In re Ames Dept. Stores, Inc.

• Decision Date: 08 March 2002
• Docket Number: Bankruptcy No. 01-42217 (REG).,Adversary No. 01-8139A(AJG).
• Parties: In re AMES DEPARTMENT STORES, INC., et al., Debtors. LFD Operating, Inc., Plaintiff, v. Ames Department Stores, Inc. and Ames Merchandising Corporation, Defendants.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

274 B.R. 600

In re AMES DEPARTMENT STORES, INC., et al., Debtors LFD Operating, Inc., Plaintiff, v. Ames Department Stores, Inc. and Ames Merchandising Corporation, Defendants.

Bankruptcy No. 01-42217 (REG).

Adversary No. 01-8139A(AJG).

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

March 8, 2002.

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Butler, Fitzgerald & Potter, P.C., Raymond Fitzgerald, of Counsel, New York City, for Plaintiff.

Weil, Gotshal & Manges LLP, Martin J. Bienenstock, Howard B. Comet, of Counsel, New York City, for Defendants.

MEMORANDUM DECISION REGARDING PROCEEDS FROM THE SALE OF PLAINTIFF'S MERCHANDISE IN DEFENDANTS' STORES

ARTHUR J. GONZALEZ, Bankruptcy Judge.

I. Introduction

On September 6, 2001, Plaintiff, LFD Operating Inc. ("LFD"), commenced this adversary proceeding against Defendants, Ames Department Stores, Inc. and Ames Merchandising Corporation (hereinafter, "Ames"), seeking the return of $8.9 million from Ames to LFD. LFD asserts its claim based upon a series of agreements that allegedly prescribe that the $8.9 million is the property of LFD and, hence, should be excluded from Ames's bankruptcy estates.

LFD is a licensee that sells footwear and other related merchandise in Ames's stores. Plaintiff seeks declaratory relief based on contract, agency, trust, and constructive trust principles. LFD's primary argument is premised on paragraph 41 of the relevant agreement between the parties, which provides that all proceeds from the sale of LFD merchandise shall be the property of LFD from the time of such sale, and that Ames shall act as LFD's agent and trustee until such time as the proceeds are paid over to LFD. In response, Ames contends that LFD is an unsecured creditor and therefore is not entitled to any return of funds. Ames argues that using the words "trust" or "agent" in a contract does not create a valid trust or agency in bankruptcy if a debtor is allowed to commingle monies and is not required to pay over funds immediately or on demand. Ames has cited to, among other things, a number of "store-within-a-store" decisions of various courts to support this proposition. In response to LFD's constructive trust theory, Ames contends that the equitable remedy of a constructive trust results in only an unsecured claim against the bankruptcy estate and therefore LFD is not entitled to any immediate payment.

In lieu of live testimony, the litigants submitted joint stipulated facts and deposition transcripts of all witnesses to this proceeding.¹ The witnesses to this adversary proceeding, organized alphabetically, are as follows:

• Linda M. Cote — Vice President of Planning and Treasury of Ames, deposed on November 9, 2001;

• Rolando de Aguiar — Chief Financial and Administrative Officer of Ames, deposed on November 2, 2001;

• Kathleen Guinnessey — Vice President of Finance for LFD's parent, Footstar, as well as Treasurer of LFD, deposed on November 2, 2001;

• David H. Lissy — Senior Vice President and General Counsel of Ames, deposed on November 9, 2001;

• Stephen Metivier — Underwriter and Portfolio Manager for General Electric Capital Corporation ("GECC"), deposed on November 8, 2001;

• Maureen Richards — Senior Vice President, Corporate Secretary and General Counsel of LFD's parent, Footstar, as well as General Counsel and Corporate Secretary to LFD, deposed on November 5, 2001;

• Mark von Mayrhauser — Vice President Controller of Ames, deposed on November 9, 2001; and

• Elizabeth White — Chief Financial Officer of Casual Male, formerly known as JBI Holding, Inc. ("Baker"), deposed on November 7, 2001.

The Court heard oral argument on the parties submissions, including their memoranda of law² and exhibits, on December 4, 2001. The following decision is the Court's findings of fact and conclusions of law under Rule 52 of the Federal Rules of Civil Procedure, as incorporated into this adversary proceeding under Rule 7052 of the Federal Rules of Bankruptcy Procedure.

II. Jurisdiction

The Court has subject matter jurisdiction of this matter under 28 U.S.C. §§ 1334(b) and 157(a) and the "Standing Order of Referral of Cases to Bankruptcy Judges" of the United States District Court, dated July 10, 1984 (Ward, Acting C.J.). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B) and (E).

III. Factual and Procedural Background

Ames and certain affiliated entities filed these voluntary chapter 11 cases on August 20, 2001. Ames is a regional discount retailer that operates, as of the filing of this complaint, approximately 452 stores in 19 states and in the District of Columbia. LFD is a licensee that sells footwear and related merchandise in Ames's stores. LFD is the assignee of an agreement entered into between Ames and Baker. The present controversy arose when Ames failed to remit certain payments to LFD totaling at least $8.9 million. Ames acknowledges that LFD is owed at least $8.9 million³ and admits that Ames failed to make payments due and owing to LFD. The relevant background regarding this adversary proceeding is as follows.

A. The Relationship Between Ames and Baker

By agreement dated November 17, 1987 ("Agreement"), Ames licensed Baker to operate shoe departments in various Ames stores ("Departments"), (Stipulation of Facts ¶ 1) (hereinafter "SF"). Baker was the owner of all merchandise that Baker sold in Ames's stores. (SF ¶ 2.) The Agreement required that Baker furnish and operate the Departments by purchasing and supplying fixtures, purchasing and supplying merchandise, and hiring all necessary personnel as Baker employees. (SF ¶ 2.) All sales of Baker merchandise were to be processed through Ames's cashiers, (SF ¶ 3), and the proceeds therefrom were processed through the regular channels of Ames's business.⁴ (SF ¶ 12.) The Agreement states that "[a]ll proceeds of cash sales of merchandise in said department shall be paid directly to and handled directly by Ames'[s] cashiers and shall in no event ... be handled by any representative or employee of Baker...." (Agreement ¶ 4b at Ex. 1.) The Agreement also required that Ames keep a separate and distinct account and a separate and complete set of books and records of all sales of Baker's merchandise. (SF ¶¶ 5, 6.)

The Agreement required Ames to provide to Baker a weekly statement of Baker's sales of merchandise from the second preceding week, not later than Friday. (SF ¶ 7.) Concurrently, with the delivery of the statement of sales, the Agreement also required Ames to pay to Baker the balance due from the same weekly statement after Ames deducted (1) the amount of commissions, fees and monies due and payable to Ames, and (2) the amount of any and all other charges against Baker's account made by Ames in accordance with the terms of the Agreement. (SF ¶ 7; Agreement ¶ 4b at Ex. 1.) The Agreement provides that:

"Net Sales" as such term is used in this Agreement shall mean the total (gross) amounts charged by Baker for or in connection with (1) any and all sales of goods, wares and merchandise and/or (2) all services rendered in, upon or from said department or from any part of the store in which the licensed premises are located by Baker, and the total (gross) amount of all charges for services performed by Baker in, upon or from any part of the licensed premises, and sales, wherever made, of goods, wares and merchandise of Baker stored or displayed in said department or in said store, whether such sales shall be for cash or credit.... "Net Sales" shall not include any customer returns, allowances, credits or refunds....

(Agreement ¶ 3c at Ex. 1.)

In practice, the course of dealings between Ames and Baker resulted in Ames providing the statement of sales and payment for Baker's shoe sales on the Monday immediately after the Friday referred to in the Agreement. (SF ¶ 10.) Both the statement of sales and the payment to Baker reflected one week's worth of sales for merchandise sold approximately two weeks before. (SF ¶¶ 7, 10; White Dep. at 8-9.)

The Agreement was amended as of April 29, 1989.⁵ (SF ¶ 13.) Amendment I, among other things, added paragraph 41 to the Agreement. Paragraph 41 states in relevant part that:

It is further confirmed and agreed that all proceeds from the sale of merchandise of Baker to customers ... shall be the property of Baker from the time of such sale, that Ames shall act as Baker's agent in the collection and holding of such proceeds, and that Ames shall hold such proceeds in trust for Baker until such time as they are paid over to Baker....

(Amendment I ¶ 13 at Ex. 2.)

Elizabeth White, Chief Financial Officer of Casual Male, formerly known as Baker, testified that it was her understanding that from 1987 to 2001 Baker's proceeds and Ames's proceeds were put into the same cash registers and bank accounts. (White Dep. at 5-10, 12, 22.) Ms. White was responsible at Baker for insuring that monies were received from Ames for Baker's footwear sales in the Ames stores. (White Dep. at 7.)

Testifying on the course of dealings between Baker and Ames, Ms. White stated that it was her understanding that after payments were made at Ames's cash registers for Baker merchandise, and prior to the time Ames made payment to Baker approximately two weeks later, Ames took the cash, checks and other means of payment from the cash registers and deposited them into bank accounts. (White Dep. at 8-9, 22.) Whatever bank accounts Ames was using, it was Ms. White's understanding that customer sales from Baker merchandise and Ames's other receipts were put into the same bank accounts. (White Dep. at 22.) Ms. White was unaware of any changes in the way Ames processed money from 1987 until Baker assigned its rights under the Agreement to LFD in 2001. (White Dep. at 9-11.)

Ms. White explained that the reason Ames kept an account of what Baker product was sold was to use that information to pay Baker.⁶ (White Dep. at 17-18.) For...