Fox v. Peck Iron and Metal Co., Inc., Complaint No. C80-0253-M

CourtUnited States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Southern District of California
Writing for the CourtJAMES W. MEYERS
Citation25 BR 674
Decision Date22 December 1982
Docket NumberComplaint No. C80-0253-M,Bankruptcy No. 80-01270-M11.
PartiesJoseph N. FOX, Trustee of Scrap Disposal, Inc., a California corporation, Plaintiff, v. PECK IRON AND METAL COMPANY, INC., a Virginia corporation, Defendant.

25 B.R. 674 (1982)

Joseph N. FOX, Trustee of Scrap Disposal, Inc., a California corporation, Plaintiff,
v.
PECK IRON AND METAL COMPANY, INC., a Virginia corporation, Defendant.

Complaint No. C80-0253-M, Bankruptcy No. 80-01270-M11.

United States Bankruptcy Court, S.D. California.

December 22, 1982.


25 BR 675
COPYRIGHT MATERIAL OMITTED
25 BR 676
Jay D. Hanson, Jan S. Gonnerman, Gray, Cary, Ames & Frye, San Diego, Cal., for plaintiff
25 BR 677

Edgar P. Boyko, Fletcher W. Paddison, Miller, Boyko & Bell, San Diego, Cal., for defendant.

MEMORANDUM OPINION

JAMES W. MEYERS, Bankruptcy Judge.

I

On May 16, 1980, the debtor, Scrap Disposal, Inc. ("Scrap"), filed for protection under Chapter 11 of the United States Bankruptcy Code ("Code").

On July 2, 1980, the debtor filed the initial complaint in this case. The defendant, Peck Iron and Metal Company, Inc. ("Peck"), filed its answer on August 22, 1980.

On November 2, 1980, the debtor filed a motion for summary judgment. On January 8, 1981, the debtor moved for permission to file an amended complaint. On January 13, 1981, Peck filed its own motion for summary judgment and its opposition to the filing of an amended complaint. These matters came on for hearing before this Court on January 29, 1981, at which time this Court denied the motions for summary judgment and granted leave to the debtor to file an amended complaint. Peck filed its answer to this complaint on March 2, 1981.

On March 20, 1981, the Court appointed Mr. Joseph N. Fox to act as Chapter 11 trustee.

The case came on for trial before this Court, sitting without a jury, on September 10, 1981. The trial continued on September 11, 16 and 17.

On September 10, 1981, Peck filed another motion for partial summary judgment and for judgment on the pleadings. These motions came on for a hearing before this Court on September 29, 1981, and were taken under submission. Peck filed yet another motion for summary judgment on November 9, 1981, which was denied by this Court after a hearing.

The trial continued on November 30 and December 1, 2, 3 and 4, 1981.

On December 15, 1981, the plaintiff's motion to file a second amended complaint was granted.

Trial continued on February 9, 10, 11, 12, 16 and 17, 1982. The final arguments were heard on February 23, 1982. At the conclusion of the trial, the parties were directed to submit closing briefs and further evidence in the form of edited transcripts of certain deposition testimony. Peck filed its closing brief on March 26, 1982, while the trustee filed its supplemental argument on March 29, 1982. Thereafter, the edited transcript of the testimony of Mr. Wynn Williams was filed on April 19, 1982.

On September 13, 1982, this Court filed its initial memorandum decision announcing findings of fact and conclusions of law. On September 24, 1982, the trustee filed a motion to alter and amend these findings and conclusions and to consider the question of the award of attorneys' fees and other costs of litigation. This motion came on for a hearing on October 12 and 28, 1982. At the last hearing the parties were granted leave to file further memorandums, with the last pleading being filed on November 17, 1982.

II

SECOND AMENDED COMPLAINT

The trustee's second amended complaint contains four causes of action. They each are concerned with a transaction originating on August 6, 1976.

The first cause of action claims that the structuring of the deal, as a sale from the debtor to Peck and a subsequent leaseback, was a sham intended to disguise the true nature of the transaction, which the trustee claims was a financing scheme for the sale of a Harris Automatic Baler Shear ("Shear") and a loan secured by real and personal property. The trustee urges this Court to make findings declaring the true nature of the transaction, and to enter other appropriate relief.

The second cause of action claims that the payments made by the debtor and the trustee to Peck were interest payments in excess of the legal limit, under California

25 BR 678
law, and that this Court should grant the estate damages, which would be treble the amount of the payments from July 2, 1979

The third cause of action claims that the payments made to Peck after May 16, 1980, constitute unlawful preferential distributions, and damages should be awarded in favor of the estate.

The last cause of action claims, in the alternative, that if a bona fide sale/leaseback, then the transaction did not comply with the requirements of California fraudulent conveyance statutes (see California Civil Code Section 3440(h)), so that this Court should award damages in favor of the estate.

Peck filed its answer to this version of the complaint on January 5, 1982. The answer disputed the allegations contained in the complaint and asserted ten affirmative defenses.

III

OTHER RELATED PROCEEDINGS

From an early point in these proceedings the debtor, and then the trustee, have been faced with a considerable dilemma, given their theory of the estate's legal rights in regard to Scrap's transactions with Peck. Even though the transactions were denominated a sale of Scrap's assets to Peck with a leaseback to Scrap, the debtor has argued that this was actually a disguised financing arrangement. The problem presented centered on the option provision contained in the lease agreement which allowed Scrap to buy back the real estate and equipment, by paying $2,045,000, or exchanging real estate. The payment, or exchange, was to take place within 366 days, subsequent to notice of intent to exercise the option. Scrap had given such notice on December 5, 1979.

On November 21, 1980, apparently in an effort to protect the estate's rights under the option, the debtor filed a motion to assume the lease as an executory contract. In bringing that motion, the debtor expressly reserved its rights to contest the true nature of the Peck deal, a question then pending before this Court in this litigation. In its moving papers, the debtor offered to post an irrevocable Wells Fargo Bank letter of credit for $2.3 million to provide the necessary adequate assurance required by the Code. See 11 U.S.C. § 365(b)(1). The letter of credit was offered to cover the option price of $2,045,000 and any arrearages under the contract. Peck opposed this motion, which initially came on for hearing on November 25, 1980, and was continued to December 16, 1980, to allow for discovery to be completed, the preparation of legal memorandums and a pre-hearing conference.

The motion was heard on December 16, 17, 19 and 23, 1980. On January 6, 1981, this Court filed its order allowing the debtor to assume the Peck lease, conditioned on the debtor posting a commitment letter for $2.3 million from the Wells Fargo Bank. The debtor was not required to make any exchange, or payment, to Peck until this Court rendered judgment in this complaint, or until six months had passed. If payment was required before judgment, then this Court retained the power to equitably adjust the rights of the parties. In addition, Western States Investment Corporation ("Western States"), the owner of the debtor, was required to deposit a written guaranty of up to $300,000 to cover any amounts over $2.3 million, which this Court might find to be owing to Peck, after trial of this complaint. On January 16, 1981, Peck filed a notice appealing this Court's order, allowing assumption of the lease contract, to the Bankruptcy Appellate Panel for the Ninth Circuit ("Appellate Panel").

On May 15, 1981, after a hearing, this Court filed an order confirming the sale of the bulk of the assets of the estate to Western States, or its nominee, for $2.6 million.1 Since this was subject to any interest or claim of Peck, Western States was required to provide the adequate assurance cited in this Court's order of January 6, 1981, if it wished to have the sale free and

25 BR 679
clear of the Peck claim. To this end, as required by this Court to protect Peck, Western States caused $2.6 million to be deposited into the escrow opened to handle the sale, and posted with the trustee letters of credit for $2.3 million, and the necessary guarantee. Thus, on July 16, 1981, this Court filed detailed findings of fact and conclusions of law with its order giving final authorization to the closing of the sale, free and clear of Peck's interest, to Western States' nominee, San Diego Steel, Inc. As of this date, a total of $5.2 million in cash, letters of credit and guarantees was required to be posted in order to cover the sale of the assets and to provide adequate protection for Peck's claims

Subsequent to the entry of the order confirming the sale, Peck demanded to be paid the $2.3 million posted to provide protection for its interests. Six months having passed since this Court determined the mode of adequate assurance of their interest, then the funds were allowed to be paid over to Peck. This payment, of course, is subject to further review after judgment is entered in this proceeding.

On October 28, 1981, the Appellate Panel issued its opinion on Peck's initial appeal of this Court's order allowing assumption of the lease, remanding to this Court. In re Scrap Disposal, Inc., 15 B.R. 296, 8 B.C.D. 504 (9th Cir.B.A.P.1981). In its opinion, the Appellate Panel rejected Peck's argument, regarding the election of remedies, by noting that Scrap could seek relief under alternative theories. 15 B.R. at 297, 8 B.C.D. at 506. However, the Appellate Panel remanded the case directing that the debtor should seek its relief in one proceeding. In this, the Appellate Panel ordered that:

this matter is remanded to the trial court. If that court rules in the declaratory relief action that the sale and lease-back with option was a disguised mortgage or security agreement, the order permitting assumption of the executory contract should be vacated and the underlying motion denied. If the trial court rules that the transaction was a true
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1 practice notes
  • Matter of Hagedorn, Bankruptcy No. 1-82-00154
    • United States
    • United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Southern District of Ohio
    • December 30, 1982
    ...that he comprehended the seriousness of his financial problems at that time. When he finally realized in December that he was unable to 25 BR 674 pay his bills, he made no further purchases on his Visa Hagedorn's failure to comprehend his financial condition might be attributable to many th......
1 cases
  • Matter of Hagedorn, Bankruptcy No. 1-82-00154
    • United States
    • United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Southern District of Ohio
    • December 30, 1982
    ...that he comprehended the seriousness of his financial problems at that time. When he finally realized in December that he was unable to 25 BR 674 pay his bills, he made no further purchases on his Visa Hagedorn's failure to comprehend his financial condition might be attributable to many th......

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