Hardwick Clothes, Inc. v. Jahn (In re HC Liquidation, Inc.)

Decision Date13 November 2019
Docket NumberNo. 1:13-bk-16079-SDR,Adversary Proceeding No. 1:18-ap-1005-SDR,1:13-bk-16079-SDR
Citation609 B.R. 731
Parties IN RE: HC LIQUIDATION, INC., Debtor, Hardwick Clothes, Inc., Plaintiff, v. Richard P. Jahn, Jr., Trustee, Defendant.
CourtU.S. Bankruptcy Court — Eastern District of Tennessee

609 B.R. 731

IN RE: HC LIQUIDATION, INC., Debtor,

Hardwick Clothes, Inc., Plaintiff,
v.
Richard P. Jahn, Jr., Trustee, Defendant.

No. 1:13-bk-16079-SDR
Adversary Proceeding No. 1:18-ap-1005-SDR

United States Bankruptcy Court, E.D. Tennessee.

Signed November 13, 2019


609 B.R. 736

Jerrold D. Farinash, Amanda M. Stofan, Farinash & Stofan, Chattanooga, TN, for Plaintiff.

James A. Fields, Samples, Jennings, Ray & Clem, PLLC, Chattanooga, TN, for Defendant.

MEMORANDUM OPINION

Shelley D. Rucker, UNITED STATES BANKRUPTCY JUDGE

609 B.R. 737

I. Summary

On January 18, 2018, Hardwick Clothes, Inc. ("Plaintiff") filed a complaint in this adversary proceeding against Richard P. Jahn, Jr., chapter 7 trustee of the Debtor's bankruptcy estate ("Trustee" or "Defendant"). [Doc. No. 1].1 The complaint was amended on November 9, 2018. [Doc. No. 44]. The controversy between the parties stems from an asset purchase agreement ("APA") and bill of sale (together the "agreement") entered into between the Plaintiff's predecessor in interest, Jones CapitalCorp, LLC, as the buyer and the Debtor, HC Liquidation, Inc. f/k/a Hardwick Clothes, Inc. ("Debtor") as the seller. [Id. at 1-2, 5-6]. This court approved the sale on June 6, 2014. [Id. at 2]. The Trustee took over the Debtor's estate approximately five months after the sale closed.

The central dispute in this case is over which party owns and has the right to proceeds from a certificate of deposit at First Tennessee Bank ("CD"), which had a balance at the time of the sale of $325,000.2 The Plaintiff seeks a declaratory judgment that it purchased the CD from the Debtor under the terms of the agreement and requests that the court order the Trustee to return the CD, or its value, to the Plaintiff. The Trustee contends that the CD was not conveyed by the terms of the agreement and remains in the Debtor's bankruptcy estate for distribution to creditors. In support of this position, the Trustee argues that, after the sale, the parties to the transaction did not act as though the CD had been sold. The Trustee also raises the equitable defenses of laches, failure of consideration, and equitable estoppel. In support of these defenses, the Trustee primarily argues that post-sale representations made by an officer of the Plaintiff were misrepresentations on which he relied when asserting control over the CD and which resulted in damage to the estate. The Trustee also argues that the Plaintiff improperly delayed asserting its interest in the CD and is unable to show that it paid consideration for the CD.

The court held a trial on June 4-5, 2019. Based upon the testimony of the witnesses, the exhibits admitted, and the arguments of counsel, the court makes the following findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.

For the reasons stated below, the court finds that the Debtor and the Plaintiff intended to convey the CD under the terms of the agreement. However, post-sale actions taken by the Plaintiff and its employees prevent the Plaintiff from entitlement to the full amount of the CD at the time of conveyance. Based on the doctrine of equitable estoppel, the Plaintiff's recovery will be reduced by the amount of proceeds, $101,300, that the Trustee obtained in reductions from the CD and relied on in making an interim distribution to creditors before the Plaintiff asserted an interest in the CD on September 21, 2017. The court will order the Trustee to return the remaining CD in its reduced amount and in its current form to the Plaintiff along with $75,000 representing funds that he obtained from the CD but has not yet distributed to creditors, less the costs of obtaining the $75,000 and administering

609 B.R. 738

and attempting to liquidate the remaining certificate of deposit.

II. Jurisdiction

28 U.S.C. §§ 157 and 1334, as well as the general order of reference entered in this district, provide this court with jurisdiction to hear and decide this adversary proceeding. The parties agree that the Plaintiff's action is a core proceeding and have also consented to this court's entry of judgment. [Doc. No. 44, at ¶¶ 1-2; Doc. No. 52, at ¶¶ 1-2]; see 28 U.S.C. §§ 157(b)(2)(A),(O).

III. Facts

a. Witnesses

At trial, the court heard testimony from the following witnesses:3

i. Thomas Hopper, the Debtor's President.4

ii. William Aiken, the Debtor's corporate counsel.

iii. W. Allan Jones, Jr., the owner and sole member of Jones CapitalCorp, LLC.

iv. Joe Mason, Senior Vice President / CFO of Jones CapitalCorp, LLC.

v. Robert Belcher, a CPA who performed auditing and financial statement review for both the Debtor before the sale and the Plaintiff after the sale.

vi. Carmin Chastain, a former accounting manager and Treasurer for the Debtor who later became an accounting officer and CFO of the Plaintiff.

vii. Richard P. Jahn, the Trustee of the Debtor's bankruptcy estate.

b. Debtor's Business and Filing

The Debtor manufactured men's custom suits and uniforms for over one hundred years. The Debtor was a major employer in Cleveland, Tennessee, where it operated for the duration of its existence. The Debtor filed bankruptcy on December 2, 2013, when it was faced with the prospect of the Pension Benefit Guaranty Corporation ("PBGC") closing the company due to its failure to fund its pension plan. [Tr. Ex. 41, at 5-6]. The Debtor's management viewed the best alternative to liquidation by the PBGC to be the sale of the company as an ongoing concern. [Id. at 6]. Mr. Jones testified that he was interested in purchasing the assets of the Debtor in order to "save the company" and "[a]ll the jobs" that went with it. [Testimony of Allan Jones, at 3:29:55].

c. The Sale Motion and Order

On March 19, 2014, the Debtor filed a motion for authorization to sell "substantially all" of its assets to Jones CapitalCorp, LLC, the Plaintiff's predecessor in interest ("Sale Motion"). [Tr. Ex. 1]. By filing this Sale Motion, the Debtor sought to have the court approve the APA by which it sold its assets to the Plaintiff. In an order approving the sale entered on June 6, 2014 ("Sale Order"), the court authorized the Debtor "to convey the assets of Debtor, all of which are more fully described in the Asset Purchase Agreement filed with the Sale Motion." [Tr. Ex. 5, at ¶ 4]. In the paragraphs of the Sale Order that followed, the word "Assets" was capitalized but not defined. In paragraph 25 of the Sale Order, the court authorized the Debtor:

609 B.R. 739
to transfer the Assets of Debtor in accordance with the terms of the Asset Purchase Agreement. The Assets of Debtor shall be transferred to Jones CapitalCorp, LLC, and upon consummation of the Asset Purchase Agreement, such transfer shall (a) be valid, legal, binding and effective; (b) vest Jones CapitalCorp, LLC with all right, title and interest of the Debtor in the Assets of Debtor; and (c) be free and clear of all Claims, with all Claims that represent interest in property to attach to the net proceeds of the Sale Transaction, in the order of their priority and with the same validity, force and effect which they now have against the Assets of Debtor, subject to any claims and defenses the Debtor may possess with respect thereto. Jones CapitalCorp may designate one or more assignees to take title to any or all assets at the time of closing without further order of the Court.
Id. at ¶ 25].

d. The Asset Purchase Agreement

The APA set forth the substance of the parties' agreement, including which assets were to be sold. The APA defined the term "Assets" in Paragraph 1.02(b), as follows:

"Assets" shall mean, collectively, all of the Debtor's assets of any nature whatsoever, real, personal or mixed, known or unknown including, but not limited to the fee interest in the Land and Improvements, Accounts Receivable, Equipment, Inventory, Supplies, Intellectual Property, all of Seller's memorabilia, historical artifacts, historic samples, historic clothing, archives, relics, keepsakes, souvenirs, pictures, books, accounting records, newspaper articles, Intangible Personal Property, Records, Assumed Contracts, pre-paid assets, refunds, unclaimed funds, customer and other deposits, including utility deposits, and other intangible and tangible assets, whether real, personal, or mixed, which are located upon the Land or owned and held for the use by Seller in connection with the Business but excluding the Excluded Assets in all cases.

[Tr. Ex. 2, at ¶ 1.02(b) ].

Section 2.01 of the APA set forth the assets to be sold:

Agreement to Sell and Purchase. In consideration of the mutual covenants and promises contained in this Agreement, and subject to the approval of the Bankruptcy Court to be set forth in the Sale Order (as hereinafter defined), Seller agrees to sell, assign, transfer, and convey unto Purchaser the Assets, and Purchaser agrees to purchase all of Seller's right, title, and interest in and to the Assets, upon the terms and conditions set forth herein, such Assets being more particularly described on Exhibit 2.01 attached hereto. Subsequent to the
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