In re 599 Consumer Electronics, Inc.
| Decision Date | 03 May 1996 |
| Docket Number | No. 95 Civ. 903 (MBM).,95 Civ. 903 (MBM). |
| Citation | 195 BR 244 |
| Parties | In re 599 CONSUMER ELECTRONICS, INC. d/b/a Brothers and BCL Photo, Inc., d/b/a Brothers, Debtors. In re BROTHERS CAMERAS, INC., Debtor. In re BROCORP CAMERAS & ELECTRONICS, INC., Debtor. |
| Court | U.S. District Court — Southern District of New York |
Michael S. Fox, Frederick J. Levy, Maura I. Russell, Traub, Bonacquist & Fox, New York City, for Appellants.
Eugene P. Cimini, Jr., Randi-Sue Weinberg, Jaspan, Ginsberg, Schlesinger, Silverman & Hoffman, Garden City, New York, for Respondent.
This bankruptcy appeal was filed by several creditors who supplied cameras and other consumer electronic products to four now bankrupt corporations. Appellants challenge the Bankruptcy Court's refusal to order substantive consolidation of the Chapter 7 bankruptcy proceedings of the four debtors. For the reasons that follow, the decision of the Bankruptcy Court is vacated, and the case is remanded.
The proceedings below involve four related debtors: Brothers Cameras, Inc. ("Brothers"), Brocorp Cameras & Electronics, Inc. ("Brocorp"), BCL Photo, Inc. ("BCL"), and 599 Consumer Electronics, Inc. ("599"). Each debtor operated a retail outlet in New York City specializing in the sale of cameras and other small electronic devices. The companies and stores were owned and managed by members of the Mizrahi family of Brooklyn, New York. Albert Mizrahi served as President of all four companies. Albert's brother Maurice served as Vice President and Maurice's wife Rachel served as bookkeeper of all four companies. (Tr. at 72-75)1
The Brothers store was the flagship of the Mizrahi family's camera store empire. Located at 130 West 34th Street in Manhattan, the store opened in 1979 and closed in 1990. The Brocorp store, located at 200 Broadway in downtown Manhattan, opened in 1985 and closed in 1990. (Id. at 76-77) Although both stores ceased doing business in 1990, neither corporation was dissolved at that time. (Appellants' Br. at 4)
The BCL store, located at 466 Lexington Avenue in Manhattan, opened in 1983 and closed in 1992. The 599 store, located at 599 Lexington Avenue in Manhattan, opened in 1987 and closed in 1992. (Tr. at 76-77)
Appellants are 12 suppliers that sold goods to all four companies: Canon U.S.A., Inc., Diplomat Merchandise Corp., Gamla Enterprises N.A., Inc., International Dictating & Telephone Equipment, Inc. ("IDTE"), J & B Trading Company, Minolta Corporation, Olympus Corporation, Pentax Corporation, Pro Mark Distributors, Inc., Ricoh Corporation, Superior Merchandise Electronics Co. ("SME"), and Thomson Consumer Electronics, Inc.
Each appellant was a creditor of Brothers and/or Brocorp when those companies ceased operations in 1990, and each appellant continued to do business with BCL and 599 until 1992. Each appellant received partial payment from BCL and/or 599, on debts owed by Brothers and/or Brocorp, before the former two companies filed for bankruptcy protection in 1992.
On May 4, 1992, BCL and 599 filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code. Four days later, the Bankruptcy Court entered an order consolidating those two proceedings for administrative and procedural purposes only. On July 1, 1992, the Bankruptcy Court converted the two cases into Chapter 7 liquidation cases. In July 1992, respondent Kenneth Silverman was appointed trustee for the estates of BCL and 599. (Ex. 1 ¶¶ 1-2; Ex. 2 ¶¶ 1-3)2
On October 25, 1993, Silverman filed two adversary proceedings in the Bankruptcy Court. As trustee for 599, Silverman sued Gamla, IDTE, Minolta, Olympus, Ricoh, SME, and Thomson, seeking to set aside as fraudulent conveyances the payments those suppliers had received from 599 in satisfaction of debts owed by Brothers and Brocorp. (Ex. 2 ¶ 5) As trustee for BCL, Silverman pressed a similar lawsuit against Canon, Diplomat, Gamla, IDTE, J & B, Minolta, Olympus, Pentax, Pro Mark, SME, and Thomson. (Id. ¶ 6) All of the defendants in the two adversary proceedings, and no other parties, are appellants here.
On January 4, 1994, the defendants in the adversary proceedings filed petitions for involuntary relief under Chapter 7 against Brothers and Brocorp. On April 4, 1994, the Bankruptcy Court entered an order of relief against Brothers. After a hearing, on May 17, 1994, the Court entered a similar order against Brocorp. (Ex. 1 ¶ 3; Ex. 2 ¶ 4)
In July 1994, appellants moved for the substantive consolidation of all four bankruptcy proceedings. (Ex. 1) If the Brothers and Brocorp bankruptcy cases are substantively consolidated with the BCL and 599 cases, the two adversary proceedings may be rendered moot — the consolidation of the estates of the companies that received the disputed payments with the estates of the companies that made them generally defeats fraudulent conveyance claims, because "the merger of the two estates leaves no party unjustly enriched and no creditors looking to an impoverished asset pool for payment." In re Parkway Calabasas Ltd., 89 B.R. 832, 839 (Bankr.C.D.Cal.1988), aff'd, 949 F.2d 1058 (9th Cir.1991). Respondent, as trustee for BCL and 599, opposed the motion. (Ex. 2)
At a hearing conducted on November 21, 1994, the Bankruptcy Court, Cornelius Blackshear, J., heard testimony from four witnesses: Robert Salis, a certified public accountant who had reviewed the debtors' financial records, Albert and Maurice Mizrahi, and Nicholas Gallo, a credit manager for appellant Olympus.
Salis testified that few financial records were available for his review. The Mizrahis had produced virtually no records for Brothers and Brocorp, and had provided records for BCL and 599 dating back only to 1988. (Tr. at 23-24) In his review of the BCL and 599 documents, Salis discovered several intercompany loans among the four debtors, some of which apparently never were repaid. (Id. at 24-34)
On cross-examination, it was elicited that BCL and 599 filed separate tax returns and maintained separate bank accounts, financial statements, and payroll ledgers. (Id. at 46-48) Salis also conceded that the unpaid intercompany loans involved relatively small amounts of money. (Id. at 56-59)
Albert Mizrahi testified that the family was "running all four stores as one company," and that all four stores operated and advertised under the name "Brothers Cameras." (Id. at 78-79, 82) He explained that the Mizrahis treated the assets of the companies as a common fund. For example, whenever one company found itself illiquid and unable to pay its bills, it would draw funds from bank accounts maintained by the other three companies. (Id. at 91, 95) Similarly, when Brothers borrowed a substantial amount of money from Republic Bank, all four companies shared in the loan proceeds. (Id. at 94)
Generally, Albert Mizrahi testified, invoices for merchandise shipments would be paid by whichever company received the merchandise. However, on a few rare occasions, suppliers billed one company for goods shipped to one of the other three companies. (Id. at 103-08)
Maurice Mizrahi testified that the four debtors filed separate credit applications with each supplier, and that "it was obvious to the suppliers there were four stores that existed." (Id. at 144)
Gallo testified that Olympus opened separate credit accounts for each of the four entities, but maintained common accounts for sales commission credits and cooperative advertising credits. (Id. at 152-57, 158-69) Although Olympus did not secure guarantees from any of the companies for payment of the debts of any of the other companies, Gallo claimed that Olympus based its credit decisions on the performance of the Brothers entities as a group. (Id. at 169-70, 182)
At the conclusion of Gallo's testimony, the movants rested. Before presenting any evidence, the trustee moved for a judgment on partial findings pursuant to Fed.R.Civ.P. 52(c), made applicable to the proceedings below by Rules 7052 and 9014 of the Federal Rules of Bankruptcy Procedure.3 Rule 52(c) provides:
If during a trial without a jury a party has been fully heard on an issue and the court finds against the party on that issue, the court may enter judgment as a matter of law against that party with respect to a claim or defense that cannot under the controlling law be maintained or defeated without a favorable finding on that issue. . . . Such a judgment shall be supported by findings of fact and conclusions of law. . . .
The Court granted the trustee's motion. First, the Court found that the movants had failed to prove "that this company was a single economic unit." (Tr. at 198-99) In reaching that conclusion, the Court gave great weight to the admission of the Olympus representative that Olympus assigned a separate account number to each of the four stores. (Id. at 199) Second, the Court determined, with little discussion of the issue, that the commingling of assets identified by the movants did not justify consolidation. (Id.) Third, the Court found that the four companies were not held out to creditors as a single unit. (Id.) Finally, the Court declined to impose on the movants a sanction pursuant to Fed.R.Civ.P. 11, although the Court believed that this was a "perilously close" case for a sanction. (Id.)
Appellants filed a notice of appeal on December 29, 1994.
Jurisdiction for this appeal is premised on 28 U.S.C. § 158(a) (1988). This court reviews the Bankruptcy Court's legal conclusions de novo, but will set aside that Court's findings of fact only if clearly erroneous. In re Ionosphere Clubs, Inc., 922 F.2d 984, 988 (2d Cir.1990), cert. denied, 502 U.S. 808, 112 S.Ct. 50, 116 L.Ed.2d 28 (1991); Fed. R.Bankr.P. 8013.
The leading Second Circuit case on substantive consolidation is In re Augie/Restivo Baking Co., 860 F.2d...
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