In re American Spring Bed Mfg. Co., Bankruptcy No. 92-18538-JNF
| Decision Date | 23 April 1993 |
| Docket Number | Adv. No. 92-1604.,Bankruptcy No. 92-18538-JNF |
| Citation | 153 BR 365 |
| Parties | In re AMERICAN SPRING BED MANUFACTURING COMPANY d/b/a American Chain Link Fence Company, Debtor. UNITED STATES TRUST COMPANY, Plaintiff and Defendant-in-Counterclaim, v. RARITAN RIVER STEEL CO., INC., Cyclone Fence, a division of USX Corporation and Paul Grella, Trustee, Defendants, Plaintiffs-in-Counterclaim, Third Party Plaintiffs, v. AMERICAN CHAIN LINK FENCE CO., INC. and Century Tube Corporation, Third Party Defendants. |
| Court | U.S. Bankruptcy Court — District of Massachusetts |
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David J. Reier, Boston, MA, for trustee.
Bertin C. Emmons, Boston, MA, for U.S. Trust Co.
Richard L. Campbell, Cambridge, MA, for Cyclone Fence.
Donald R. Peck, Boston, MA, for American Chain Link Fence Co.
Five motions are before the Court. Three motions were filed by the third party defendants (erroneously identified in the pleadings as defendants-in-counterclaim), American Chain Link Fence Co., Inc. ("ACL") and Century Tube Corporation ("Century"), and comprise the following: "Motion to Dismiss Trustee's Fraudulent Conveyance Count for Failure to Comply with Rule 7009, or in the Alternative, for a More Definite Statement;" "Motion to Dismiss Counterclaim sic of the Chapter 7 Trustee or, in the Alternative, for Summary Judgment;" and "Motion to Dismiss Counterclaim sic of Raritan River Steel Co., Inc. or, in the Alternative, for Summary Judgment." The plaintiff in this action, United States Trust Company ("UST") filed the remaining two motions, one for summary judgment against defendant Raritan River Steel Co., Inc. ("Raritan") and the other against Cyclone Fence, a division of USX Corporation ("Cyclone").
The filing of these motions and the plethora of oppositions, affidavits and memoranda filed in association with them were precipitated by the filing of an involuntary petition under Chapter 7 against American Spring Bed Manufacturing Company d/b/a American Chain Link Fence Company (the "Debtor") on August 18, 1992, and by UST, on September 9, 1992, when it filed a "Complaint to Determine Validity Priority and Extent of Security Interest," naming Raritan, Cyclone and the Chapter 7 Trustee (the "Trustee") as defendants.
In its complaint, UST alleges, inter alia, that it held a perfected security interest in all the Debtor's inventory, goods merchandise, materials, raw materials, goods in process, finished goods, packaging and shipping materials and other tangible personal property including after acquired property and proceeds, to secure an indebtedness of $2,333,728.38. UST further alleges that Cyclone and Raritan sold goods for resale to the Debtor in the spring and summer of 1992; that Cyclone and Raritan filed complaints in the state court in which they asserted an interest in the goods they sold to the Debtor; and that on August 6, 1992, the Debtor sold all its inventory, excluding the Cyclone and Raritan inventory, and applied the proceeds of the sale to pay in part its indebtedness to UST, leaving a balance of $271,722.38. UST also alleges that it sold the Cyclone and Raritan inventory for $231,188.75 and is holding the proceeds in escrow. UST, through its complaint, seeks an order from this Court declaring that its interest in the Debtor's inventory and any proceeds from the sale of the Cyclone and Raritan inventory is valid, perfected and a first priority security interest (and superior to any other interest) to the extent of the Debtor's outstanding obligations. UST also seeks release of the funds in escrow.
Cyclone, Raritan and the Trustee filed answers to UST's complaint, and asserted numerous affirmative defenses. Raritan raised six affirmative defenses: 1) failure to state a claim upon which relief can be granted; 2) lack of good faith; 3) equitable subordination; 4) estoppel; 5) receipt of a preference; and 6) priority of reclamation rights. Cyclone raised the reclamation defense as well as affirmative defenses based upon lack of title or voidable title and failure to give new value. Additionally, Raritan and the Trustee filed counterclaims against UST, and third party claims against ACL and Century. The Trustee and Raritan each filed virtually identical Statements of Claims in their counterclaims and third party claims. They aver that UST knew the Debtor was insolvent during the year prior to the commencement of the involuntary, that UST engaged in a course of conduct to improve its position at the expense of Raritan and unsecured creditors, that UST participated in negotiations for the sale of the Debtor's business to Century, acting as lender to both buyer and seller, and that UST acted in concert with ACL and Century to enable the Debtor's business to continue as if the sale had not occurred.
Based upon these allegations, Raritan formulates two counts: a reclamation count against UST, in which it asserts its rights to the inventory it supplied the Debtor are superior to the rights of UST, and a successor liability count against ACL, in which it asserts ACL is a "mere continuation" of the Debtor and, consequently, a successor to the Debtor's liabilities. Based upon the same allegations, the Trustee asserts five counts: 1) a preference count against UST; 2) an equitable subordination count against UST; 3) a fraudulent conveyance count against ACL and Century; 4) a successor liability count against ACL and Century; and 5) a preference count against ACL and Century. The motions filed by UST, ACL and Century now before the Court are in response to the affirmative defenses, counterclaims, and third party claims.
Many of the relevant facts are not in dispute. On or about October 17, 1989, the Debtor signed, among other documents, a security agreement in which it granted UST a security interest in certain assets, including "all of its the Debtor's inventory, goods, merchandise, materials, raw materials, goods in process, finished goods, packaging and shipping materials and other tangible personal property now owned or thereafter acquired and held for sale or lease. . . ." UST perfected its security interest in the collateral by filing financing statements with the Secretary of State's Offices for the Commonwealth of Massachusetts, the State of Connecticut and the State of New York, as well as with various town clerks. In reliance upon the security interest, UST established a revolving line of credit in favor of the Debtor in the maximum amount of $3,000,000. UST made loans and advances based upon 80% of the face value of eligible accounts receivable (under 120 days old) and up to 50% of the cost value of the Debtor's inventory. UST made loans and advances to the Debtor through August 6, 1992, at which point it was owed $2,333,728.38.
Between June 16, 1992 and early July 1992, Raritan sold and delivered wire rod to the Debtor for purpose of resale. Raritan did not perfect a security interest in the inventory prior to the dates on which UST perfected its security interest.
Between May 28, 1992 and June 16, 1992, Cyclone sold and delivered 13,500 posts to the Debtor for purpose of resale. The total purchase price was $117,585.00 with payment due within 30 days of delivery. Cyclone did not perfect a security interest in the inventory prior to the dates on which UST perfected its security interest.
Due to the Debtor's inability to collect its account receivable and resulting inability to borrow under its revolving line of credit with UST, the Debtor decided to sell its assets and began negotiating with Century, one of its creditors. On July 24, 1992, the Debtor, ACL and Century executed an Asset Purchase Agreement. On the same day, ACL complied with the Massachusetts Bulk Sale Law, Mass.Gen.Laws Ann. Ch. 106, §§ 6-101-6-110 (West 1990), by mailing notice of the impending asset transfers to all the Debtor's creditors shown on a sworn list provided by the Debtor.
The Asset Purchase Agreement, which was executed by the Debtor, ACL, and ACL's parent, Century, provided:
1. Purchase and Sale of Business Assets. Subject to and upon the terms and conditions set forth in this Agreement, Seller will sell, transfer, convey assign and deliver to Purchaser, and Purchaser will purchase, at the Closing (as defined in Section 3 below) hereunder, all of the business, assets, properties, goodwill and rights of seller as a going concern, of every nature, kind and description, tangible and intangible, wheresoever located and whether or not carried or reflected on the books and records of Seller (hereinafter sometimes collectively called "Seller\'s Assets"), and including, without limitation, all of Seller\'s inventory on hand as of the Closing Date (as hereinafter defined) all accounts and notes receivable existing at the Closing date, land, buildings, improvements, machinery and equipment, supplies, vehicles, fixtures, deposits, prepaid expenses, contract rights, the name American Chain Link Fence Company, the good will associated therewith, all trade names, trademarks, brand names, patents, know-how and other intellectual property, licenses, permits, business records, customer lists, trade secrets, and any other assets used in Seller\'s business excluding only (A) the minute books, corporate seal and stock records of Seller, and (B) cash on hand as of the Closing Date. Seller\'s Assets shall be conveyed free and clear of all liabilities, obligations, liens and encumbrances excepting only those liabilities and obligations which are expressly to be assumed by Purchaser hereunder as set forth in Schedule 1(a) hereto and those liens and encumbrances securing the same which are set forth in Schedule 1(b) hereto.
The letter dated July 24, 1992, which was executed by the Debtor's principal and forwarded to all creditors in accordance with the Article Six of Massachusetts' version of the Uniform Commercial Code dealing with bulk transfers, was attached...
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