In re AMERICAN CARTAGE Inc., Civil Action No. 10-40017-FDS.

• Decision Date: 30 September 2010
• Docket Number: Civil Action No. 10-40017-FDS.
• Citation: 438 B.R. 1
• Parties: In re AMERICAN CARTAGE, INC., Debtor. City Sanitation, LLC, Appellant, v. John A. Burdick, as Chapter 7 Trustee; Allied Waste Services of Massachusetts, LLC; and William Zoll, Appellees.
• Court: U.S. District Court — District of Massachusetts

438 B.R. 1

In re AMERICAN CARTAGE, INC., Debtor.City Sanitation, LLC, Appellant,

v.John A. Burdick, as Chapter 7 Trustee; Allied Waste Services of Massachusetts, LLC; and William Zoll, Appellees.

Civil Action No. 10-40017-FDS.

United States District Court,D. Massachusetts.

Sept. 30, 2010.

COPYRIGHT MATERIAL OMITTED.

Richard Joyce, Marshall F. Newman, Newman & Newman, P.C., Boston, MA, for American Cartage, Inc. and City Sanitation, LLC.

Kenneth S. Leonetti, Euripides D. Dalmanieras, Foley Hoag LLP, Boston, MA, for Allied Waste Services of Massachusetts, LLC.

John A. Burdick, Jr., Burdick & DiLeo, Worcester, MA, pro se.

MEMORANDUM AND ORDER ON APPEAL FROM BANKRUPTCY COURT

SAYLOR, District Judge.

This is an appeal from a final order of the United States Bankruptcy Court for the District of Massachusetts. The order at issue (1) found that the Chapter 7 Trustee had exclusive standing to prosecute claims brought by appellant City Sanitation, LLC against appellees Allied Waste Services of Massachusetts, LLC and William Zoll, and (2) approved settlement of those claims.

For the reasons set forth below, the order of the Bankruptcy Court will be affirmed.

I. Background A. The Chapter 11 Filing

On July 23, 2003, debtor American Cartage, Inc., a trash disposal company, filed a bankruptcy petition under Chapter 11. (App. at 51-52). ¹ Financial Federal Credit, Inc. (“FFCI”), was American's senior secured creditor. ( Id. at 75). At the time of the bankruptcy filing, American owed FFCI $175,491. ( Id.). Pursuant to an August 23, 2002 security agreement, FFCI also retained a perfected security interest in certain of American's property. The property was described in the security agreement as

all goods, inventory, equipment, accounts, accounts receivable, chattel paper, documents, instruments, contract rights, general intangibles, investment property, securities entitlements, deposit accounts, fixtures and other property, wherever located now or hereafter belonging to [American] or in which [American] has any interest, and in all proceeds, insurance proceeds, substitutions, replacement parts, additions and accessions of and/or to all of the foregoing (collectively, the “Collateral”).

( Id. at 293, ¶ 1).

In July 2003, the Bankruptcy Court entered various orders authorizing American to use cash collateral subject to FFCI's security interest. ( Id. at 301, July 25 order; id. at 302, July 31 order). The orders granted FFCI “replacement liens in the same collateral and same priority as currently exists, as adequate protection for any diminution of [its] position.” ( Id.).

On August 4, 2003, the Office of the United States Trustee filed an “Emergency Motion to Dismiss Case or to Convert Case to Case under Chapter 7.” ( Id. at 59-65). The motion averred generally that American had failed to obtain business liability insurance and, as a result, was placing the general public and its creditors at substantial financial risk. ( Id. at 59). On August 5, the Bankruptcy Court directed the appointment of a Chapter 11 Trustee to administer American's bankruptcy estate. ( Id. at 66). The next day, John A. Burdick was appointed as Trustee and replaced American's management. ( Id. at 67).

On September 4, acting upon a request by the Trustee, the Bankruptcy Court authorized the hiring of William M. Zoll to serve as controller and office manager and to assist the Trustee in American's day-to-day ongoing business operations. ( Id. at 86). Zoll was hired and performed those roles from late 2003 to the beginning of 2005.

B. The Chapter 7 Conversion

On January 20, 2005, after administering the estate for approximately 18 months, the Trustee filed a motion to convert the case to a Chapter 7 proceeding. ( Id. at 88-89). In support of the motion, the Trustee stated that “it does not appear that [American] will be able to file a viable Plan of Reorganization.” ( Id. at 88). The Trustee testified in a later hearing that the conversion was necessary because “there were continuing losses of the estate-we had some post-petition wage claims and other administrative claims-and the debtor just wasn't-simply wasn't generating enough cash.” ( Id. at 417). In particular, American was faltering in its efforts to provide waste disposal services for its clients, many of whom are located in the North End neighborhood of Boston and are required to have their trash collected each day in order to comply with local health ordinances. ( Id. at 176-77, 420). With the Trustee's knowledge and consent, Zoll sought another waste disposal company to service American's customers. ( Id. at 177). Zoll advised the trustee that he had contacted Allied and that Allied was willing to provide waste disposal services to American's customers. ( Id.). The Trustee asserts that he had no objection to Allied providing waste removal services so long as American's estate did not incur any further expenses. ( Id.).

On February 7, 2005, the Bankruptcy Court granted the Trustee's motion, and converted American's Chapter 11 case into a Chapter 7 liquidation, and Burdick was retained as Chapter 7 Trustee. ( Id. at 141-42).

Allied subsequently hired Zoll as an employee. ( Id. at 177).

C. FFCI Seeks Relief from the Automatic Stay

On February 1, 2005, FFCI moved in the Bankruptcy Court for an order granting it relief from the automatic stay and seeking authority to take possession of and sell the collateral that was subject to its August 2002 security agreement with American. ( Id. at 93-98). Because liquidation was imminent, the collateral was no longer necessary to an effective reorganization. ( Id. at 97). FFCI requested authority to apply the proceeds of such a sale to satisfy the debt owed by American. ( Id. at 98). On February 7, the same day the Bankruptcy Court converted American's case to a Chapter 7 proceeding, it also entered an order granting FFCI relief from the stay and ordering American to turn over two tractors, a hoist, and other equipment that was subject to FFCI's security interest (the “Equipment Collateral”). ( Id. at 143-44).

On March 14, 2005, FFCI (joined by the Trustee) filed a joint second motion for relief from the automatic stay, this time requesting that it be allowed to take possession of and sell the remaining assets that were subject to its security interest (the “Other Collateral”). ( Id. at 145-58). The motion represented that FFCI had agreed to sell the Equipment Collateral at a private sale to a company known as Todesca Equipment Co., Inc. for purchase price of $115,000, and that Todesca had offered to purchase the Other Collateral for $27,500. ( Id. at 151). The Trustee assented to the motion on the condition that he receive $12,500 in carve-out funds to be used to pay for certain administrative expenses. ( Id. at 151-52). Finally, FFCI represented that

[t]he amounts realized from the sale of the Other Collateral, after accounting for the sale of the Equipment Collateral, will be sufficient only to pay the amounts due and owing from [American] to FFCI and those administrative or priority claims paid from the carve-out funds.

( Id. at 152).

The joint motion included a proposed “Order Granting Relief from Stay” to be used should the Bankruptcy Court grant the motion. ( Id. at 157-58). As the Bankruptcy Court later acknowledged, the proposed order's description of the “Other Collateral” was “far more expansive” that the August 2002 security agreement's description of collateral. (Bankr.Mem. at 2). In particular, the proposed order included the following language, which was not present in the security agreement: “trade names, service names, service marks, telephone numbers, [and] choses in action.” ( Id.; App. at 157). ² Nevertheless, on March 20, 2005, the Bankruptcy Court granted the joint motion and signed the order in the form proposed by the parties. (App. at 159-60). The order authorized FFCI to

enforce all of its rights under its security interest in the foregoing Other Collateral, including, without limitation, selling the Other Collateral at [a] public or private sale in accordance with applicable state law, and applying any proceeds of sale to any and all of its claims against [American].

( Id. at 160). FFCI subsequently sold the assets that were subject to its security interest to Todesca for $144,500, which is $2,000 more than FFCI had represented that Todesca was willing to pay. ( Compare id. at 231-32, with id. at 151). In its appendix filed with this Court, City Sanitation, LLC (“City”) for the first time included a bill of sale showing that Todesca resold these assets to City in April 2005 for $147,000, $2,500 more than Todesca paid. (App. at 314-16; see Bankr.Mem. at 2). The Trustee thereafter presided over the winding-down of American's estate. On November 15, 2007, the Trustee filed a “Final Report And Account After Distribution And Request For Discharge.” ( Id. at 38, 161-65). The report showed that, in addition to the proceeds received by FFCI in satisfaction of its claims, $12,631.35 had been paid to administrative and priority creditors, but that general unsecured creditors had not received a distribution. ( Id. at 38, 161-65). On November 16, the Bankruptcy Court entered an order approving the final report and closing the case. ( Id. at 38, 166).

D. City Sues Allied and Zoll in State Court

On February 7, 2007, while the bankruptcy case was still pending and without notice to the Trustee, City filed a complaint in Middlesex Superior Court against Allied and Zoll. ( Id. at 203-32, 418). ³ City contended that it was the “successor-in-interest” to American and asserted various claims in that capacity, including claims for conversion, interference with contractual relations, interference with an advantageous relationship, breach of fiduciary obligation, civil conspiracy, and RICO.

( Id. at 204, 213-21). Generally, the complaint alleged the following: that during the pendency of the bankruptcy, and after he had obtained...