In re BS Livingston & Co., Inc.
| Decision Date | 23 August 1995 |
| Docket Number | Civ. A. No. 94-3535 (MTB). Bankruptcy No. 92-20480G. Adv. No. 93-2301. |
| Citation | 186 BR 841 |
| Parties | In re B.S. LIVINGSTON & CO., INC., Debtor. Robert GIBBONS, et al., Plaintiffs, v. STEMCOR USA, INC., et al., Defendants. |
| Court | U.S. District Court — District of New Jersey |
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Myron S. Lehman, Lehman, Lehman & Gruber, Livingston, NJ, for appellants.
William S. Katchen, Lowenstein, Sandler, Kohl, Fisher & Boylan, Roseland, NJ, Robert J. Stickles, Carpenter, Bennett & Morrissey, Newark, NJ, for appellees.
At the heart of this adversary complaint is a very substantial allegation that the former principals of the debtor corporation orchestrated a blatant fraudulent conveyance several months prior to the filing of a bankruptcy petition. As a result, the complaint alleges, several banks, who were secured creditors to the tune of millions of dollars, were left with little more than the empty husk of the debtor from which to recoup their losses.
B.S. Livingston & Co., Inc., the debtor, was a steel trading middleman business. Alfred Schnog, Anita Schnog and Albert Ouaknine (hereinafter "the BSL principals" or "appellants") were the primary shareholders and officers of B.S. Livingston. To purchase the considerable quantities of steel required by the business, B.S. Livingston needed large amounts of capital. To this end, it negotiated with a group of banks to create a significant line of credit. This group included Chase Manhattan, N.A. (the lead bank), National Westminster Bank, U.S.A., Chemical Bank (the successor in interest to Manufacturers Hanover), and Fidelity Bank, N.A. (hereinafter "the Banks" or "appellees").1
While the Banks had previously extended loans to B.S. Livingston pursuant to an intercreditor agreement, a further credit agreement governing the terms of the loans extended to B.S. Livingston by the Banks was executed on August 1, 1990. Appellees' Brief, at 4.2 In exchange for the loans, B.S. Livingston executed promissory notes in the amount of $4.9 million to each Bank. Id. These notes were secured by previously executed security agreements granting the Banks security interests in substantially all of B.S. Livingston's personal property then existing and thereafter acquired general intangibles. Id., at 4-5.
During 1990 and 1991, B.S. Livingston's financial condition continued to deteriorate. The BSL principals attempted to find potential purchasers for the company, but ultimately concluded that liquidation was the only avenue available to them. Appellants' Brief, at 6. To this end, Alfred Schnog met with Mark Harrison of Chase on May 31, 1991. The BSL principals allege that at this meeting, Mr. Schnog informed Mr. Harrison that (1) Standard Chartered Bank had elected not to proceed with financing; (2) the BSL principals had been unable to find a purchaser of the entire enterprise; (3) liquidation was the only available avenue; and (4) the BSL principals were in negotiations with several prospective buyers, including Stemcor, a British company. Id. Mr. Schnog alleges that Mr. Harrison gave him some encouragement by stating that he thought that the BSL principals were doing "just the right thing." Id.
This meeting was followed by Mr. Schnog's June 13, 1991 letter to Thomas Cassin of Chase in which Mr. Schnog informed Mr. Cassin that he had reached an advanced stage of negotiations with one potential buyer of the core business, i.e. Stemcor. Id., at 7. Mr. Schnog concedes that Mr. Cassin sent him a letter dated June 18, 1991 in which Mr. Cassin stated that he viewed B.S. Livingston as being in default and requested projections of the liquidation, but emphasizes that Mr. Cassin also stated his support for the repayment of B.S. Livingston's loan obligations through an orderly liquidation.3
By agreement dated September 16, 1991, the BSL principals agreed to sell the core of the BSL business to Stemcor. The transaction was memorialized in four documents. (Exhibits N through Q to the Schnog Affidavit). It appears that the only compensation B.S. Livingston received was $800,000 for its inventory, with the remainder of the compensation going to the BSL principals who were provided with lucrative positions in Stemcor's newly-formed BSL division. The principals' compensation was in part tied to the profitability of this new division. See Schnog Affidavit, Exhibit N. By an amendment to the agreement, the BSL principals were allowed to continue working for B.S. Livingston. Id., Exhibit O. Furthermore, Stemcor was granted a license to use the B.S. Livingston name. Id., Exhibit P.4
Apparently, the Banks first learned that the Stemcor transaction had occurred at a meeting between the Schnogs and representatives of Chase, Manufacturers Hanover and NatWest on September 23, 1991. The BSL principals claim that no objection was voiced at that meeting. Appellants' Brief, at 9. They admit, however, that by letter dated September 25, 1991, Chase objected to the transaction and requested, without waiving any right to claim a default, that the BSL principals supply the Banks with more information to monitor the liquidation. Id., at 9-10. By letter dated November 8, 1991, the Banks informed the BSL principals that certain events of default had occurred, and that the transfer to Stemcor was "unauthorized". Id., at 10. By letter dated November 26, 1991, the Banks reiterated that they believed that certain events of default had occurred, rendering the entire outstanding debt owed by B.S. Livingston due and payable to the Banks. Id., at 11. Once again, the Banks proposed to forebear from pursuing their remedies if the BSL principals supplied more information to the Banks and signed an agreement to repay the indebtedness by a weekly sweep mechanism. Id. The BSL principals agreed to do so. Id.
On January 22, 1992, B.S. Livingston filed a Chapter 11 petition. By order of the bankruptcy court dated March 2, 1992, the Chapter 11 proceedings was converted into a Chapter 7 proceeding with Robert Gibbons remaining as Trustee. Appellees' Brief, at 5.
By order dated April 6, 1992, the Banks were granted relief from the automatic stay to pursue their rights and remedies to the inventory and accounts receivable. Id., at 6. See Schnog Affidavit, Exhibit V. This order also contained a reference to a stipulation "that the Debtor does not have any equity in the inventory and accounts receivable, and that this collateral is not necessary to an effective reorganization of the Debtor's estate", and further stated that "said inventory and accounts receivable shall be immediately surrendered to the possession and control of the Banks to liquidate said collateral in a commercially reasonable manner." Id., at 3. On November 13, 1992, the bankruptcy court issued an "Order Clarifying Order Dated April 6, 1992". This order, which was submitted by the Banks' attorneys and signed by the bankruptcy judge without alteration, "clarified" the earlier order so as to "make clear that the Trustee pursuant to the April 6, 1992 order remains the holder of title to all of the debtor's accounts receivable, causes of action, general and other intangibles, subject to the valid perfected liens and security interest in that property in favor of the Banks." See Certification of Gary F. Eisenberg, Exhibit N.
The adversary complaint now before this court was filed in the pending bankruptcy action on May 21, 1993. At the heart of the complaint is the allegation that the Stemcor transaction constituted a fraudulent conveyance. Spinning off this central claim (which is embodied in Counts 1 through 3 of the complaint) are claims for conversion (Count 4), tortious interference with contractual relations (Count 5), tortious interference with economic advantage (Count 6), conspiracy (Count 7), breach of the duty of loyalty (Count 8), and successor liability (Count 9). On September 30, 1993, the BSL principals filed a motion to dismiss the complaint in its entirety alleging lack of subject matter jurisdiction; the related grounds of estoppel, waiver and laches; and, alternatively, requesting abstention. Also in the alternative, the BSL principals moved for dismissal or summary judgment on each and every count of the complaint in which they were named.
By opinion dated May 25, 1994 and order dated June 21, 1994, the bankruptcy court denied the BSL principals' motions. Unfortunately for this court, the BSL principals timely filed their notice of appeal on July 1, 1994.
As a preliminary matter, this court notes that a district court sitting in its appellate role may only disturb factual findings of the bankruptcy court if they are clearly erroneous. See Bankr.R. 8013; J.P. Fyfe, Inc. of Florida v. Bradco Supply Corp., 891 F.2d 66, 69 (3d Cir.1989). The bankruptcy court's legal findings, however, are subject to plenary review. Id.; Matter of Glen Properties, 168 B.R. 537, 538 (D.N.J.1993). When reviewing a matter which is committed to the discretion of the bankruptcy court, the district court may only determine whether or not the bankruptcy court abused its discretion. Id.; see also, In re Vertientes, Ltd., 845 F.2d 57, 59 (3d Cir.1988).
Appellees first attempt to short circuit the BSL principals' appeal by challenging the appellate jurisdiction of this court.5 Inasmuch as the question of appellate jurisdiction is inextricably intertwined with the question of subject matter jurisdiction, the two issues will be discussed together.
To begin with, a district court may hear an appeal from the bankruptcy court if the order appealed from is a "final order" creating an appeal by right, or if the order, although not final, meets certain conditions that enable the district court to entertain it as an interlocutory appeal. Under one particularly...
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