In re Albion Disposal, Inc.

• Decision Date: 18 March 1993
• Docket Number: Bankruptcy No. 91-12805 M to 91-12807 M,Adv. No. 91-1333 K.,91-12889 M and 91-12878 M
• Parties: In re ALBION DISPOSAL, INC., Debtor. In re I & J DISPOSAL OF WESTERN NEW YORK, INC., Debtor. In re J & I DISPOSAL, INC., Debtor. In re 11372 MAIN STREET, INC., Debtor. In re ORLEANS SANITARY LANDFILL, INC., Debtor. Craig A. SLATER, as Trustee of Albion Disposal, Inc., I & J Disposal of Western New York, Inc., J & I Disposal, Inc., 11372 Main Street, Inc., and Orleans Sanitary Landfill, Inc., Plaintiffs, v. John M. SMITH and Irene M. Smith, SSWS, Inc., Defendants.
• Court: U.S. Bankruptcy Court — Western District of New York

152 B.R. 794 (1993)

In re ALBION DISPOSAL, INC., Debtor.

In re I & J DISPOSAL OF WESTERN NEW YORK, INC., Debtor.

In re J & I DISPOSAL, INC., Debtor.

In re 11372 MAIN STREET, INC., Debtor.

In re ORLEANS SANITARY LANDFILL, INC., Debtor.

Craig A. SLATER, as Trustee of Albion Disposal, Inc., I & J Disposal of Western New York, Inc., J & I Disposal, Inc., 11372 Main Street, Inc., and Orleans Sanitary Landfill, Inc., Plaintiffs, v. John M. SMITH and Irene M. Smith, SSWS, Inc., Defendants.

Bankruptcy Nos. 91-12805 M to 91-12807 M, 91-12889 M and 91-12878 M, Adv. No. 91-1333 K.

United States Bankruptcy Court, W.D. New York.

March 18, 1993.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Jack L. Getman, Goldman, Costa, Getman & Biryla, Raymond L. Fink, Saperston & Day, P.C., Buffalo, NY, for trustee Craig A. Slater.

John J. Hurley, Paul K. Stecker, Phillips, Lytle, Hitchcock, Blaine & Huber, Buffalo, NY, for SSWS, Inc.

Carl L. Bucki, Cohen, Swados, Wright, Hanifen, Bradford & Brett, Buffalo, NY, for John Smith.

PART ONE. INTRODUCTION

MICHAEL J. KAPLAN, Chief Judge.

In August of 1991, these Debtor corporations filed for relief under Chapter 11 of the Bankruptcy Code claiming millions of dollars of debt. Shortly thereafter, bidders amassed seeking to acquire the Debtors' assets (principally a licensed sanitary landfill, trash hauling companies, and appurtenances) as well as lands titled in the names of John and Irene Smith. The corporate and private parcels, when combined as a single unit, were thought to be worth vastly more than the aggregate debts. The Smiths, husband and wife, founded these closely-held Debtor companies 25 years ago. When the companies were filed under the Bankruptcy Code, the Smiths let it be known that their interests in the adjacent lands could (on the right terms) be purchased along with the corporate assets. Vigorous efforts were undertaken by an informal committee of creditors and bidders to resolve "the right terms" with the Smiths as to their interests. On the eve of a "level-field" auction of the corporate assets in which the Smiths would be assured their price, the Smiths secretly executed a lease of the Smith-titled lands to one of the creditor-bidders who was not a member of the informal "committee". The existence of the lease was then disclosed. Bidding for the corporate assets all but collapsed in light of the "lock" upon the adjacent lands. Expectations of full payment to creditors were dashed. This litigation results.

These are reciprocal motions for Summary Judgment upon certain Causes of Action contained within a Complaint by a Chapter 11 Trustee against an individual who owned and controlled the corporate debtors, his wife, and their grantee (hereinafter SSWS, Inc., SSWS, or lessee). The Complaint challenges many aspects of the Smiths' claim of exclusive ownership of real estate adjacent to these Debtor corporations' real estate and place of business, and it challenges the validity of the Smiths' post-petition leasing of their lands to SSWS.

To a limited extent, the factual situation before the Court is not unique, merely rare. But it is not surprising that the issues presented are not addressed in the reported cases because of three unique features, to be addressed shortly. Even so, the Court would have thought the governing principles in this multi-million dollar litigation to be obvious to those involved.

Some of the principles are:

1. A contract may be imputed from conduct.

2. The Statute of Frauds is a shield, not a sword.

3. A Chapter 11 Debtor's rights under an executory contract are "property of the estate," protected by the automatic stay of 11 U.S.C. § 362.

4. A Chapter 11 Debtor-in-Possession is a Trustee, as are its officers and directors.

5. A Trustee may not profit at the expense of his trust.

6. Those who confederate with a Trustee in breach of his trust are also liable for the breach.

These principles coalesce into the concept that if a corporate principal (in this case, a principal owner and controlling officer or director) causes the corporation (and its creditors) to spend $2.4 million in developing lands that included the principal's own lands as part of a very valuable project in which the corporation was to share, then when that principal files the corporation in Chapter 11, he may not deal freely for his own benefit in his land so improved, even if he "never got around" to granting to the corporation a recorded or recordable interest in those lands.¹ The governing principles further coalesce to establish that one who fully knows these facts, and who purchases rights to the land seeking to obtain an unfair advantage over others bidding for the bankrupt's assets, acquires at most an interest that is subject to the claims of the corporation's creditors.

Generically, the facts at bar are that the corporation possesses assets that are of limited value without the principals' assets, and vice versa, and the two together are worth a great deal. Bankruptcy Courts regularly see cases of this kind: instances in which the corporation owns unique manufacturing facilities and the principal owns the patent; the corporation owns the profitable operations and the principals own the land upon which they must be conducted (such as resort property); the corporation owns the name and the principals own everything else (or vice versa); etc.

The facts at bar are unique, however, in three ways. First, the relationship between the corporation and the principal here (which relationship constituted a landfill "project" worth tens of millions of dollars) was (according to the principal) never reduced to writing. Second, the principal, together with one among a number of highly solvent corporations interested in acquiring this project, decided to ignore large expenditures of corporate funds in developing the principal's "own lands," and brazen-out an argument that the corporation had no interest in the principal's lands, and thereby sought to "finesse" or preempt the bidding on the corporation's assets, to the predictable detriment of the corporation's creditors. And third, a mere constructive trust upon the profits unjustly made by the principal and/or his privies would be neither fully compensatory nor compatible with prior Orders of this Court that were entered under emergency circumstances and upon which another entity (WMNY, Inc.) has relied at great expense and in hopes of profit.

Consider, for example, the more typical case of the vacation resort that is operated by the corporation, but operates on land owned by the corporation's owners/directors. Inevitably the corporation would have some documented interest (at least a duly-executed license) upon the lands. If the principals placed the corporation in Chapter 11 and scheduled the bare license as the only interest of the debtor in that asset, the creditors would race to Court to preserve and protect that interest; to examine whether the corporation might have other legal or equitable claims upon the land; to enjoin the transfer of the land; and so forth.

What happened here is that nothing regarding the corporation's interest in the principal's land was (supposedly) ever executed, let alone recorded. Not even a bare license is admitted to have been granted. But after placing the corporation in Chapter 11 the principal and his wife (also a principal officer until at least 1986, and possibly thereafter) expressed a willingness in open court to place their interests in their lands on the auction block along with the corporate assets. The only question at that time was: For how much of the synergistic value of the combined assets would the Smiths settle? (Not just price, but also other value such as indemnities.) Then, instead of communicating that set of terms to the amassing bidders and the Creditors' Committee, they secretly reached a price with SSWS and executed a lease of "their" lands to SSWS for $30,000 per month, plus $2,000,000 if SSWS obtained the OSL lands, plus further millions of dollars (potentially) in royalties for dumping (called "tonnage") upon either the Smith lands or the OSL lands.² The informal Creditors' Committee was presented with a fait accompli. Thereafter, all of the other potential bidders for the corporate assets walked away except one, who was willing to "bet" that this lease was unlawful, as discussed later.

What looked like certain full-payment to all creditors, plus enormous gain to the principals and great profit potential from a projected four-hundred million dollar 20-year revenue stream for the successful bidder, turned into a prospect of only partial payment to corporate creditors, and into an effort to obtain great rewards for those who had subverted the expectations that were based not only on ancient principles, but also on the representations of the principal and his wife to this Court.

Another Judge of this Court has previously ruled that such profiteering cannot stand and disapproved SSWS's bid for acquisition of the corporate assets.³ Higher authority will determine whether the Court correctly rejected the bid for the corporate assets. The present Court is examining only the lease of the Smith-titled lands, not the bid for the corporate assets, and agrees that the lease is profiteering that cannot stand as against the corporate debtors' claims against those lands.

The Court will today explain that when a corporation's principal has refrained or neglected to grant the corporation a documented "property interest" in his own lands when he caused the corporation to make vast improvements in those lands and otherwise contributed his lands to a "project" for the mutual benefit of the principal and the corporation, the fact that he so refrained or neglected does not leave the corporation with no interest whatsoever in the lands that can be protected by 11 U.S.C. § 362 or § 549 when he later places the corporation in Chapter 11. He may not make a post-petition...