In re Augie/Restivo Baking Co., Ltd.
| Decision Date | 04 February 1988 |
| Docket Number | 086-60262-21.,No. 086-60208-21,086-60208-21 |
| Parties | In re AUGIE/RESTIVO BAKING COMPANY, LTD., Augie's Baking Company, Ltd., Debtors. |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Eastern District of New York |
Sanford P. Rosen, New York City, for debtors.
Dewey, Ballantine, Bushby, Palmer & Woods by Ronald L. Cohen, New York City, for Creditors Committee.
Stroock, Stroock & Lavan by Daniel H. Golden, New York City, for Mfrs. Hanover Trust Co.
Mark Brandoff, New York City, for Credit Alliance & Leasing Service.
Pinks, Brooks, Stern & Arbeit by Steven G. Pinks, Hauppauge, N.Y., for Union Sav. Bank.
Jules V. Speciner, Great Neck, N.Y., for Leon's Bakery, Inc.
Augie/Restivo Baking Company, Ltd. ("Augie/Restivo") and Augie's Baking Company, Ltd. ("Augie's"), as debtors and debtors-in-possession (collectively "debtors"), are moving to substantively consolidate their Chapter 11 cases. The cases have already been procedurally consolidated. The Augie/Restivo unsecured creditors committee and Manufacturers Hanover Trust Company ("Manufacturers Hanover") support the motion. Union Savings Bank ("Union") and First Interstate Credit Alliance, Inc., formerly Credit Alliance Corporation ("Credit Alliance"), object to substantive consolidation, as does one individual creditor.
The order which the debtors are requesting will provide for (a) consolidation of the two Chapter 11 cases into a single case for all purposes; (b) merger of the assets and liabilities of Augie's and Augie/Restivo; (c) treating all claims filed in either of the two cases as having been filed in the consolidated case and expunging all duplicate claims for the same indebtedness; (d) eliminating and disallowing all intercompany claims; (e) eliminating all cross guarantees made by either company to pay the debts of the other; and (f) filing of a single Chapter 11 Plan of Reorganization for both corporations.
The present motion has been precipitated by the fact that a buyer, Leon's Bakery, Inc. ("Leon's) has committed itself to pay over $7 million for the assets of the debtors as a single going enterprise, provided these assets can be sold free and clear of liens, pursuant to the authorization of the Bankruptcy Court. Leon's is currently operating the business of the debtors. It is the debtors' position that because their financial affairs are so intermingled, they cannot meet the conditions laid down by the buyer requiring confirmation of a plan, or plans, unless they are permitted the substantive consolidation they now seek. If they are unable to effect this sale, the likely alternative is piecemeal liquidation.
Until January 1, 1985, the two corporations, now known as Augie's and Augie/Restivo, were unrelated, independent enterprises. Augie's was the corporate vehicle through which three brothers, Agostino Moronese, Angelo Moronese and Nicholas Moronese, conducted a wholesale baking business in Long Island, outside the City of New York. Restivo Brothers Bakers, Inc., (now known as Augie/Restivo, but identified in this description of pre-1985 events as "Restivo"), was the corporate vehicle through which a different set of brothers, Louis D. Restivo and Louis A. Restivo, operated a wholesale baking and distribution business in the New York City metropolitan area.
Prior to 1985, Augie's was financed by Credit Alliance and Union. During 1980, it entered into two equipment lease and three security agreements with Credit Alliance. It also gave Credit Alliance two promissory notes dated, respectively, June 27, 1980 and July 24, 1984. The resulting indebtedness to Credit Alliance, still unpaid, was $415,000. As collateral, Credit Alliance received a security interest in Augie's machinery, equipment, goods, chattels, inventory, accounts and notes receivable and other personal property. In 1984, when Augie's was prospering and its financial statements showed it to be solvent1, it embarked upon an expansion which ultimately led it to the bankruptcy court. It enlarged or built (the record is unclear) a new facility at 135 Oval Drive, Central Islip, New York ("the real property"). It financed this construction in part from loans by Union, to which it gave mortgages in the face amount of $2,100,000. The debt secured by the mortgages has now grown to $2,955,010.45. On November 10, 1984, Augie's borrowed an additional $300,000 from Union, giving the latter a security interest in the same collateral as it had previously given Credit Alliance. The balance owed on this debt is now $365,006.99.
At the same time as Augie's was expanding its physical facilities, it was negotiating with the Restivo brothers the merger of their two operations into a single enterprise. Restivo at that time maintained its office and manufacturing facilities at 1633 Center Street, Ridgewood, New York. It financed its business through loans from Manufacturers Hanover, which held a first mortgage on its real property, as well as a security interest in its other assets.
On November 27, 1984, Augie's and Restivo entered into an agreement merging the two bakeries to become effective January 1, 1985. Pursuant to this agreement, the Moronese brothers exchanged all their stock in Augie's for 50 percent of the stock in Restivo, making Augie's a wholly owned subsidiary of Restivo. Subsequently the parent corporation changed its name to Augie/Restivo. Neither corporation was dissolved; both survived. Agostino Moronese became President of Augie/Restivo, Angelo Moronese was made Secretary, and Nicholas Moronese, Vice President. Louis D. Restivo was made Chairman and Louis A. Restivo, Vice President.
The two companies ceased to function as separate enterprises; all their activities were integrated into a single operation effective January 1, 1985. The Ridgewood building formerly owned by Restivo was sold. Manufacturers Hanover was paid approximately one million dollars out of the proceeds against a debt of approximately two million dollars. Some, or all, of the Restivo equipment (the record is unclear) was transferred to Augie's premises, where all the operations of the business continued: manufacturing, distribution and selling. After the merger, the two companies maintained only a single set of books and records under the name of Augie/Restivo. Consolidated financial statements were issued in that name.
From the effective date of the merger, all business was conducted in the name of Augie/Restivo. All customers and suppliers were sent a letter advising them that henceforth they would be doing business with Augie/Restivo. Augie's ceased to have any employees. All wages were paid by Augie/Restivo. All invoices and checks were issued in that name. All operating expenses were met from the moneys generated by Augie/Restivo, except that Augie's accounts payable for the period prior to the merger were first paid out of the receipts from Augie's pre-merger accounts receivable. At the present time there are no uncollected accounts receivable belonging to Augie's from the pre-merger period except for some $70,000 due on certain school contracts. These are still outstanding for reasons not pertinent to this opinion. All of Augie's pre-merger debts have presumably been satisfied.
No formal transfer of any assets has ever taken place. Title to the Central Islip property remains in Augie's, as does title to whatever equipment Augie's possessed on the date of merger. Augie/Restivo has never paid anything to Augie's for the use of the building or its equipment. The cost of heating the building, as well as some additional construction costs and all other post-merger liabilities, have been paid out of the proceeds of the operations of Augie/Restivo.
In April 1985, Manufacturers Hanover lent Augie/Restivo $750,000. It received back a guarantee of the debt from Augie's and a security interest in all Augie/Restivo's accounts receivable, inventory, furniture, fixtures, machinery and equipment. Augie's guarantee was also secured by a $750,000 mortgage on the Central Islip real property, subordinate to the earlier mortgages given Union. The total debt to Manufacturers Hanover now exceeds $2,900,000.
The merged enterprise proved to be a financial disaster. The expansion proved fatal to the prosperity that Augie's had previously been enjoying. On March 27, 1986, an involuntary Chapter 11 petition was filed against Augie/Restivo pursuant to 11 U.S.C. § 303 of the Bankruptcy Code. An amended involuntary petition was filed on April 2, 1986. Augie/Restivo consented to entry of an order for relief under Chapter 11 on April 16, 1986. Augie's filed a voluntary petition under Chapter 11 that same day. Each of the debtors was continued as debtors-in-possession under 11 U.S.C. § 1107. The two cases were consolidated for procedural purposes on April 16, 1986.
The schedules filed by Augie's and Augie/Restivo showed a tax liability of approximately $1,000,000 to the Internal Revenue Service and to New York State for failure to pay withholding taxes during 1985 and 1986. The schedules described these taxes as joint and several liabilities of the two debtors. Augie/Restivo's schedules showed an additional three million dollars as owed to unsecured trade creditors located throughout the New York metropolitan area, including Long Island.
Following the Chapter 11 filings, the debtors continued to believe that rehabilitation was feasible. They were able to continue doing business because Manufacturers Hanover, which held a security interest in the debtors' accounts receivable, permitted proceeds from the collection of their accounts to be used to fund the debtors' operations. As a result, the total value of the accounts receivable is less than when these cases began. Furthermore, unpaid administrative debts in the amount of $400,000 have been generated.
On September 30, 1987, in contemplation of a sale to Leon's of the merged enterprise, the debtors entered into a court approved agreement,...
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