Harriet & Henderson Yarns, Inc. v. Castle
| Decision Date | 03 December 1999 |
| Docket Number | No. 97-3032 DA.,97-3032 DA. |
| Citation | 75 F.Supp.2d 818 |
| Court | U.S. District Court — Western District of Tennessee |
| Parties | HARRIET & HENDERSON YARNS, INC., Thomaston Mills, Inc., Unifi, Inc., McMichael Mills, Jefferson Mills, Inc., RDC, Inc., Mount Vernon Mills, Inc., Huskey Knitting Mills, Jacob Textile Sales, Jones Textile, Kings Mountain Hosiery Mills, Inc., Merlin Creel Systems, Inc., O'Mara, Inc., Pharr Yarns, Inc., Ruppe Hosiery, Inc., Plaintiffs, v. Renee E. CASTLE, Wolff Ardis, P.C., Defendants. |
John L. Ryder, Apperson Crump & Maxwell, Memphis, TN, David H. Conaway, Bentford E. Martin, Blair Conaway Bograd & Martin, Charlotte, NC, Richard C. Kennedy, Jerrold D. Farinash, Kennedy Fulton Koontz & Farinash, Chattanooga, TN, for plaintiffs.
Russell E. Reviere, Rainey Kizer Butler Reviere & Bell, Jackson, TN, for defendants.
ORDER DENYING PLAINTIFFS' MOTION FOR PARTIAL SUMMARY JUDGMENT AND GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION FOR SUMMARY JUDGMENT
Before the court are Plaintiffs' motion for partial summary judgment and Defendants' motion for summary judgment. Plaintiffs' Amended Complaint includes six counts, and Plaintiffs have moved for partial summary judgment on the issue of liability as to four of those counts. For the reasons stated herein, Plaintiffs' motion is denied in its entirety. Defendants have moved for summary judgment as to the entire case. For the reasons stated herein, Defendants' motion is granted in part and denied in part.
This is a complex case, featuring multiple parties and multiple claims. It arises out of the creation in 1995 of Star Hosiery, Inc. ("Star"). FLR Hosiery ("FLR") and Lora Lee Knitting ("Lora Lee") were two pre-existing Tennessee hosiery companies both experiencing financial difficulties in early 1995. Both companies were heavily indebted to trade creditors, most of whom supplied them with raw materials. Together they owed approximately $3,000,000, much of it to Plaintiffs. Plaintiff RDC, Inc. was FLR's landlord. Plaintiffs Harriet & Henderson Yarns, Inc., Thomaston Mills, Inc., Unifi, Inc., McMichael Mills, Jefferson Mills, Inc., Mount Vernon Mills, Inc., Huskey Knitting Mills, Jacob Textile Sales, Jones Textile, Kings Mountain Hosiery Mills, Inc., Merlin Creel Systems, Inc., O'Mara, Inc., Pharr Yarns, Inc., and Ruppe Hosiery, Inc. were suppliers of yarn or textile services. Brookfield & Company ("Brookfield"), an investment banking firm, became involved with FLR and Lora Lee, assisting in the two companies' attempt to secure additional financing. Brookfield arranged a deal whereby FLR and Lora Lee would contribute substantially all their combined assets to form a new company, Star. Brookfield arranged for Congress Financial ("Congress") to finance the new company. Brookfield also engaged the Defendant law firm Wolff Ardis, P.C. ("Wolff Ardis") to represent Star during its creation, incorporation, and loan deal from Congress. Defendant Renee Castle ("Castle") was a shareholder in Wolff Ardis, and was the lead attorney for the Star transactions.
In order for Star to obtain financing from Congress, Brookfield advised that much of the pre-existing FLR and Lora Lee debt should be restructured into subordinated, convertible debenture notes ("Debenture Notes").1 The Debenture Notes were to be paid by Star over three years. To induce the existing creditors to accept the Debenture Notes, the creditors were granted a second lien in Star's machinery and equipment to secure the Debenture Notes, behind a first lien held by Congress. The creditors were also told that the Star merger and financing plan would improve the likelihood that the current debt would be paid off. As the creditors were informed about the proposed creation of Star, they were asked to sign confidentiality agreements, which prevented the creditors from sharing information or discussing the proposal.
Brookfield had Castle prepare the necessary documents. Castle drafted the Debenture Note based on a form given her by Brookfield. She also drafted the Indenture Agreement, based on a form in the Wolff Ardis computer files. The Debenture Notes provided that Star promised to pay various amounts to the different Debenture holders. They also named Wolff Ardis as trustee. Other relevant parts of the Debenture Notes included the following:
1. Payment of Principal. The total obligation of Star to all Debenture Holders is set forth in the Indenture Agreement dated as of December 1, 1995, by and between Star and Wolff Ardis P.C., as Trustee for the Debenture Holders (the "Indenture Agreement") ....
5. Indenture Agreement. This Debenture is one of several debentures of Star issued pursuant to the Indenture Agreement, the provisions of which are hereby incorporated by reference and made a part of this Debenture. All the Debentures issued pursuant to that Indenture Agreement are equally secured by a second lien and security interest in certain of Star's equipment, as more fully described in the Indenture Agreement. Reference is hereby made to the Indenture Agreement for a more detailed description of the property in which the Trustee holds a security interest, the nature and extent of the security interest, the rights and obligations of the Debenture Holder and other debenture holders, of Star, and of the Trustee.
6. Events of Default. One or more of the following events shall be deemed "Events of Default": (a) If any payment of principal and interest on this Debenture is not paid when due; provided that the Debenture Holder shall give Star written notice of such default and Star shall have sixty (60) days from receipt of such notice within which to cure such default; ...
The Indenture Agreement stated, in relevant part:
This Indenture Agreement between Star Hosiery, Inc., a Tennessee corporation (the "Company" or "Star") and Renee E. Castle of Wolff Ardis, P.C. having an address of 6055 Primacy Parkway, Suite 360, Memphis, TN 38119 (the "Trustee"), dated as of this 12th date of December, 1995 is for the benefit of certain holders of Debenture Notes ("Noteholders") who hold Debenture Notes issued pursuant to this Indenture. Such Debenture Notes are collectively referred to herein as the "Debentures." The terms of the Debentures include those stated in the Note Debentures and those made part of the Note Debentures by reference to the Trust Indenture Act of 1939 (the "Trust Indenture Act") as in effect on the date of the Debentures ... Security. The Debenture Notes shall be secured by a subordinate lien on all equipment owned by the Company. This lien shall extend on a pro rata basis to each Noteholder. It shall have a second priority (inferior to the liens securing Senior Indebtedness) on all equipment with the exception of the equipment presently encumbered by liens in favor of GECC, Speizman and Nations Bank, in which case the lien shall have a third priority....
Events of Default. One or more of the following events shall be deemed "Events of Default": (a) If any payment of principal and interest on this Debenture is not paid when due; provided that the Debenture Holder shall give the Company written notice of such default and the Company shall have sixty (60) days from receipt of such notice within which to cure such default; ...
The Trustee. The Trustee shall be under no obligation to exercise any of its rights or powers under this Indenture relating to any issue of Debentures at the request of any of the holders thereof, unless they shall have offered to the Trustee security and indemnity satisfactory to it....
The Debenture Notes prepared by Castle were sent to each Plaintiff in November, 1995 by FLR and Lora Lee, each for a varying amount. The Indenture Agreement was presented to Plaintiffs by their debtors as the best chance for them to recover the money owed them, and they were urged by FLR and Lora Lee to sign the Debenture Notes. Each Plaintiff did sign and return its Debenture Note. Once all Notes had been returned, Castle prepared the final Indenture Agreement, which stated that the total sum owed to the holders of the Debenture Notes pursuant to the Notes was $2,322,973.42.
The closing of the transactions occurred on December 12, 1995. At the closing were Defendant Castle and representatives of FLR, Lora Lee, Star, Congress, and Brookfield. None of the Plaintiffs had an attorney or other representative present. After the closing, copies of the signed Debenture Notes were sent to Plaintiffs, and the original Debenture Notes were kept in the offices of Wolff Ardis.
Castle had received instructions from Congress regarding the execution and filing of UCC-1 financing statements to perfect Congress' first lien in Star's equipment. Those financing statements, executed by Star in favor of Congress, were duly recorded with the Tennessee Secretary of State. However, there was never any discussion among any of the parties to the transaction about preparing or filing financing statements in favor of Plaintiffs. No UCC-1 financing statements were prepared, executed, or filed with regard to Plaintiffs' lien in Star's equipment. Because no financing statement was filed, the Debenture holders' lien was never properly perfected under Tennessee law.
Star made the required payments from January to June, 1996. However, it then stopped making payments, and on August 16, 1996, Star filed for Chapter 11 bankruptcy. Shortly thereafter, Plaintiffs learned that no financing statements had been filed on their behalf. Because the lien was unperfected, each Plaintiff was treated as an unsecured creditor in Star's bankruptcy case. Star's assets were sold in bankruptcy, resulting in full repayment to Congress, but only approximately a 3% dividend to Plaintiffs and other unsecured creditors. Plaintiffs contend that they would have received all or most of the debt owed to them under the Debenture Notes if their security interest...
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