In Re American Consolidated Transportation Companies Inc.

• Citation: 433 B.R. 242
• Decision Date: 13 July 2010
• Docket Number: Bankruptcy No. 09-26062.,Adversary No. 10-00154.
• Parties: In re AMERICAN CONSOLIDATED TRANSPORTATION COMPANIES, INC., et al., Debtors.American Consolidated Transportation Companies, Inc., et al., Plaintiffs,v.RBS Citizens N.A., et al, Defendants.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois

433 B.R. 242

In re AMERICAN CONSOLIDATED TRANSPORTATION COMPANIES, INC., et al., Debtors.

American Consolidated Transportation Companies, Inc., et al., Plaintiffs,

v.RBS Citizens N.A., et al, Defendants.

Bankruptcy No. 09-26062.

Adversary No. 10-00154.

United States Bankruptcy Court,

N.D. Illinois,

Eastern Division.

July 13, 2010.

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Sarah E. Lorber, The Law Office of William J. Factor, Chicago, IL, William J. Factor, The Law Office of William J. Factor, Ltd., Northbrook, IL, for Debtors.

Thomas M. Lombardo, Ricmer & Braunstein, LLP, Chicago, IL, Jeffrey D. Ganz, Riemer & Braunstein, LLP, Boston, MA, for RBS Citizens, N.A.

MEMORANDUM OPINION ON MOTION OF RBS CITIZENS N.A. TO DISMISS COUNTS I THROUGH VI AND VIII

JACK B. SCHMETTERER, Bankruptcy Judge.

This Adversary proceeding relates to the Chapter 11 case filings by American Consolidated Transportation Companies and its related companies (collectively, “American”).¹ The Complaint attacks the claim filed by American's principal secured lender, defendant RBS Citizens N.A., d/b/a Charter One (the “Bank”). American complains that the Bank induced American to enter a loan containing provisions that the Bank knew American could not meet, then improperly used American's default of those provisions to take control of and attempt to sell American's businesses, and thereby to recoup the Bank's loan.

American's attack on the Bank's claim takes the form of an eight-count Complaint. American seeks equitable subordination of the Bank's claim (Count I) and damages for violations of the Illinois Consumer Fraud and Deceptive Business Practices Act (Count II), breach of fiduciary duty (Count III), breach of duty of good faith and fair dealing (Count IV), and duress (Count V). American also objects to and seeks subordination of the Bank's swap claim (Count VI), objects to the amount and perfection of the Bank's claim (Count VII), and objects to the Bank's claim on the grounds that the Bank is not the properly named party in the recorded documents evidencing its security interest (Count VIII).

The Bank moved to dismiss Counts I through VI and VIII American's Complaint for failure to state a claim pursuant to Rule 12(b)(6) Fed.R.Civ.P., made applicable in this proceeding by Rule 7012(b) Fed. R. Bankr.P.

ALLEGATIONS OF THE COMPLAINT

In 2004, the Bank acquired Charter One Financial, Inc., and its subsidiaries in order to gain access to and expand in Charter One's markets. Following that acquisition, in 2005 and 2006, the Bank decided to expand aggressively in the Chicago market by, among other things, extending loans that contained covenants that either the borrowers did not meet or that the Bank knew the borrowers would not meet in the future.

In September and October of 2006, as part of its expansion plan, the Bank entered into a banking relationship with American, a bus and travel company based in Elk Grove Village, Illinois. During those two months, the Bank and American executed a series of documents. On September 27, 2006, the Bank and debtor D & B Rental, LLC, executed a variable rate term note in the principal amount of $4 million. Shortly thereafter, on October 2, 2006, the Bank and debtor D & B Rental, LLC, executed an interest rate swap agreement, under which D & B Rental, LLC, was to pay a fixed interest rate rather than the variable rate called for in the September 27th term note. Then, on October 12, 2006, the Bank entered into a separate transaction with the debtors other than D & B Rental, LLC. That transaction consisted of a loan and security agreement, a $1 million term note, and a $1 million revolving demand note.

The Bank was then aware of American's business problems. Internal reports prepared before the loans were executed show the Bank knew that American had just lost a major account, a loss that would reduce American's annual revenue by approximately $3 million, or 25% of American's total revenue. Those reports also show that the Bank questioned some assumptions it had earlier made about American's business, such as American's ability to increase its sales, reduce its costs, and increase its prices in order to offset the lost major account. Indeed, the Bank considered American's profitability to be “consistently below average” and its liquidity “weak.” Additionally, the reports show that, despite these “fundamental” concerns about the loans, the Bank expected that it would be able to charge and collect substantial fees and other revenue from American by providing ancillary services, such as commercial depository account services, letters of credit services, and merchant business services. The Bank also anticipated that it would charge and collect substantial fees and penalties under the swap agreement, including approximately $130,000 in initial fees and $550,000 in penalties in the event of a default.

The Bank did insist upon some protection of its position in the October 12th loan and security agreement. In addition to granting the Bank an extensive security interest, the document contains a number of covenants of default, two of which are most relevant here. The first required American to maintain a combined tangible net worth of $100,000 as of December 31, 2006, with an annual step up of $150,000. The second required American to maintain a minimum cash flow so that the ratio of earnings to payments on the loans was always at least 1.20 to 1.00.

Because of the lost major account that had previously accounted for nearly 25% of American's revenues, American was in default of the cash flow covenant at the time when the loan documents were executed. Although American contends that it was never in default of the tangible net worth covenant, an internal report by the Bank in April 2007 showed that American failed to meet either of the two covenants in 2006 after the loans closed. However, no reported action was taken against American for twenty months.

On June 10, 2008, the Bank sent American a default and acceleration letter stating, among other things, that the loans were default and had to be paid immediately because American was in default of the net worth and cash flow covenants. At the time, American was current on its payments under the loans and was not in default of any other loan provision.

The Bank's internal documents from September 2008 show that the Bank was then considering implementing a 120-day forbearance in order to provide American with time to obtain alternative financing or to sell or liquidate business assets. The Bank and American did enter into a Forbearance Agreement on December 19, 2008, and a First Amendment to the Forbearance Agreement on March 11, 2009. The Bank's internal documents show that the Bank entered into these Agreements in order to obtain additional liens on real estate in Colorado and Texas owned by American and to perfect its liens on American's busses and other collateral under the original loan agreement.

The Forbearance Agreements also required American to hire a chief restructuring consultant of the Bank's choosing, and to give to that consultant extensive managerial responsibility over American's businesses and the primary responsibility for marketing and selling those businesses. In internal documents, the Bank stated that it was “pressuring to have [the consultant] in more of a chief restructuring officer role.” In particular, the Bank required that American authorize the consultant to communicate directly with the Bank regarding all aspects of American's finances and any proposed refinancing or sale of American's businesses; direct the consultant to review, verify, and provide to the Bank all required financial reports; cooperate fully with the consultant in connection with any refinancing or sale and continue to retain the consultant until the loans were repaid; and agree that the Bank may rely on information provided by the consultant in connection with any refinancing or sale.

The Bank insisted that the chief restructuring consultant have a number of specific management duties, including: directing any sale process; providing financial analysis assistance to American to identify cost savings and improvement of margins; assisting American's Chief Executive Officer on any major business decisions; assisting the C.E.O. in supervising all of American's officers, employees, and consultants, including hiring and firing decisions and compensation; assisting American in preparing a cash flow plan and management of cash activity, including control of disbursements as to timing, priority, and amount; reviewing all check requests and other payments made pursuant to American's budget; assisting the C.E.O. in supervising all professionals, including attorneys and accountants; and assisting American in complying with the Forbearance Agreements and loan documents.

Although American wished to remain in business, the Forbearance Agreements also required American to take an active role in selling its own businesses. Specifically, it required American to use its best efforts to enter into a sale or refinancing transaction that would repay the Bank in full; to deliver to the Bank on or before May 29, 2009, at least one bona fide letter of intent or similar document for a sale or refinancing; to remit any deposit received from a perspective purchaser to the Bank; to transmit all written offers to the Bank; to deliver to the Bank an offering memorandum prepared by the chief restructuring consultant; to send out “teasers” and confidentiality agreements as requested by interested parties; to prepare due diligence materials for review by parties that execute confidentiality agreements; and to deliver to the Bank every two weeks an updated list of parties that expressed interest in a sale or refinancing.

The Bank itself also actively sought proposals to liquidate American....