Huntsman Packaging Corp. v. Kerry Packaging Corp.

• Decision Date: 03 February 1998
• Docket Number: No. 95-699-CIV-ORL-18B.,95-699-CIV-ORL-18B.
• Citation: 992 F.Supp. 1439
• Parties: HUNTSMAN PACKAGING CORP. and Pierson Industries Inc., Plaintiffs, v. KERRY PACKAGING CORP., Barnett Bank of Central Florida, N.A., Polystar Industries, Inc., Robert Smith, and John Does 1 through 5, Defendants.
• Court: U.S. District Court — Middle District of Florida

992 F.Supp. 1439

HUNTSMAN PACKAGING CORP. and Pierson Industries Inc., Plaintiffs, v. KERRY PACKAGING CORP., Barnett Bank of Central Florida, N.A., Polystar Industries, Inc., Robert Smith, and John Does 1 through 5, Defendants.

No. 95-699-CIV-ORL-18B.

United States District Court, M.D. Florida, Orlando Division.

February 3, 1998.

Richard E. Whitaker, Bogin, Munns & Munns, Orlando, FL, Russell S. Walker, Reid

W. Lambert, Woodbury & Kesler, P.C., Salt Lake City, UT, for plaintiffs.

Robert Smith, Boca Raton, FL, pro se.

Ralph V. Hadley, III, Swann, Hadley & Alvarez, P.A., Winter Park, FL, for Polystar Industries, Inc., defendant.

ORDER

G. KENDALL SHARP, District Judge.

In this case, plaintiffs Huntsman Packaging Corp. (Huntsman) and Pierson Industries, Inc. (Pierson) sued defendants Kerry Packaging Corp. (Kerry), Barnett Bank of Central Florida, N.A., (Barnett), Polystar Industries, Inc. (Polystar), Robert Smith (Smith)¹, and certain unknown defendants to recover money allegedly owed them for materials furnished to Kerry on credit terms. Plaintiffs stated their claims in a seven-count complaint. Counts I and II are by Huntsman against Kerry for collection on a promissory note and breach of an open-account contract, respectively. Count III is by Pierson against Kerry for breach of their open-account contract. Counts IV, V, and VII assert that defendants conspired to, and did in fact, execute a fraudulent transfer of Kerry's assets for less than reasonably equivalent value, in an effort to defraud Huntsman and Pierson. Finally, Count VI contains a claim against Barnett, Polystar, Smith, and the Doe defendants for unjust enrichment. On October 23, 1995, the clerk of court made an entry of default against Kerry and Smith on plaintiffs' motion. The case was later tried before the court, without a jury, on January 12-13, 1998. On January 13, 1998, the court entered a default judgment against Kerry in the amount of $538,009.06, plus applicable interest, in accordance with the clerk's entry of same. Now, in accordance with Rule 52(a) of the Federal Rules of Civil Procedure, the court issues its findings of fact and conclusions of law on the remaining claims.²

I. Findings of Fact

Prior to March 15, 1995, Kerry operated a business producing plastic packaging products in Longwood, Florida. During the times relevant to this lawsuit, Kerry was owned approximately 54 percent by Ralph Bender (Bender), 36 percent by Smith and five percent each by Peter Senecal and Allen Lemberger, two associates of Bender. Bender and his associates took no role in management. Smith was the President of Kerry and exercised complete control over Kerry's operations, including the management and control of Kerry's financial statements.

Huntsman and Pierson each supplied raw materials to Kerry on open account. In October of 1994, Kerry owed Huntsman $147,826.84 on account, which Huntsman then secured by way of a promissory note. Thereafter, Huntsman continued to sell raw materials to Kerry on open account. At the time of trial, Kerry's debt to Huntsman on open account was $87,371.25, and Kerry's debt to Pierson on open account was $171,759.65.

The total obligation to Huntsman and Pierson, with interest accrued through January 1, 1998 at the appropriate legal or contractual rates, was as follows

                Huntsman Note                     $147,826.84
                      Interest                      57,180.64
                Huntsman Open Account               87,371.25
                      Interest                      22,716.54
                Pierson Open Account               171,759.65
                      Interest                      49.559.82
                ____________________              ___________
                TOTAL                             $536,414.74
                

Kerry defaulted on its obligation to make payments to both Huntsman and Pierson.

During 1993 and the early months of 1994, Kerry lost a substantial amount of money, primarily due to sales it made to a major customer at a price unwittingly lower than Kerry's costs of production. In 1994, Kerry engaged an accounting firm to review its business. On the firm's advice, Kerry ultimately terminated its relationship with that customer on the firm's advice.

At about that same time, Kerry hired Waynne MacDonald (MacDonald) as part of its management team. Although it is unclear whether MacDonald was ever officially given the title, MacDonald functioned in virtually every way as the chief operating officer of Kerry, and third parties dealing with Kerry, including Barnett and plaintiffs, uniformly believed MacDonald to be Kerry's chief operating officer.

Throughout the time relevant to this lawsuit, Kerry was obligated to Barnett on three commercial loans, including two term notes and a line of credit. The first note was a revolving line of credit in the amount of $750,000.00, which was administered through a "lock-box" arrangement with Barnett. Under the terms of the agreement, Kerry's revenues were collected in a "cash collateral" account at Barnett and used to pay down the principal on the line of credit. To obtain working capital, Kerry was able to draw on the line of credit according to a formula as follows: 75 percent of accounts receivable under 90 days old plus 40 percent of eligible inventory not to exceed $100,000.00, less the outstanding principal balance of the loan. On March 15, 1995, the principal balance of this first loan was $182,445.04.

The second loan was a term note dated March 1, 1991, in the principal amount of $40,000.00. Kerry was current in making its payments on this loan as of March 1995, and the outstanding principal balance on the loan was $6,572.50 on March 15, 1995.

The third loan was a term note dated September 21, 1990, in the principal amount of $1,430,000.00. This loan was referred to as the "equipment loan." As of January 1, 1995, Kerry was current in its payments on the equipment loan. Kerry made interest payments on the note in January and February of 1995, but did not make timely principal payments in January and February 1995. On March 15, 1995, the outstanding principal balance on the equipment loan was $598,391.18.

In February and March of 1995, Kerry was a troubled business but was still a going concern. Its operating margins were consistent with the industry norm, and it was slowly working out of its financial difficulties under the direction of MacDonald. While some witnesses testified that Kerry was about to "go dark," the court finds that no credible evidence substantiated that assertion to a point where the court could conclude that Kerry was not a going concern.

On March 16, 1995, Kerry's accounts receivable were $484,034.94, of which all but $21,379.47 were less than 90 days old. Prior to March 16, 1995, Kerry had assigned $38,585.89 of these receivables to Polystar. Therefore the total eligible accounts receivable on Kerry's books was $424,069.58.

The only evidence as to the value of inventory on March 15, 1995 was the testimony of MacDonald and Smith who testified that it would have been similar to that reflected on the February 28, 1995 balance sheet. That amount was $309,478.36. On February 28, 1995, Kerry submitted a Borrowing Report to Barnett identifying "certified" eligible inventory of $93,261.38.

While some testimony indicated that Kerry had exhausted its line of credit in February of 1995, the court finds to the contrary. The Borrowing Report demonstrates that Kerry drew down $68,000.00 on February 21, 1995, $100,500.00 on February 24, 1995, and $55,000.00 on February 28, 1995. Based upon these figures, on March 15, 1995, Kerry would have been entitled to draw an additional $172,911.70 on its line of credit under the formula prescribed by its loan agreements.³

Further, trial testimony revealed several alternatives that Kerry had available to address its financial difficulties including a plan discussed and preliminarily approved by Barnett to sell one of its two printing presses, apply the proceeds to pay down the equipment loan, and exchange other equipment to make Kerry more profitable. Kerry did not pursue this or any other available option because it elected to sell its assets to Polystar as further described below.

In 1994, Bender and Smith began to solicit offers for the purchase of their shares in Kerry. In August of 1994, Greg Rosshandler (Rosshandler) executed an agreement to purchase the shares of Smith, Bender, and Bender's associates for combined consideration of $525,000.00. The offer was ultimately rescinded when Rosshandler developed concerns about working with Smith.

In approximately December of 1994, Hershey Friedman (Friedman), the owner of a group of companies referred to generally herein as "Polystar," became interested in purchasing Kerry. He obtained and reviewed financial information and traveled to the Kerry plant to view the equipment and discuss the operation with MacDonald and others. In January of 1995, Polystar made a conditional offer to purchase the shares of Bender and his associates for $377,500.00. That offer was accepted by Bender on January 23, 1995, with the understanding that it was conditioned upon a favorable report following due diligence. During the first part of February 1995, Polystar sent Mitchell Kirshner (Kirshner) to conduct a due diligence investigation of Kerry. Kirshner identified several areas of concern which he then communicated to Friedman.

However, before rescinding his offer to Bender based upon the due diligence discoveries, Friedman invited Smith to come to Montreal, Canada to discuss the possible purchase of Smith's shares. On approximately February 20, 1995, Smith met with Friedman in Montreal, Canada. The day after, on February 21, 1995, Friedman wrote to Bender withdrawing his offer to purchase Bender's shares.

On March 6, 1995, Friedman obtained from Mark Wilenkin, of Mark One Machinery in New Jersey, a desktop appraisal of Kerry's equipment. Sometime during this period, Robert Smith contacted Stephen Young (Young) of Barnett to arrange a meeting, which was...