In re Cara Corp.

Decision Date23 October 1992
Docket NumberBankruptcy No. 90-15397S,Adv. No. 91-1084S.
Citation148 BR 760
PartiesIn re The CARA CORPORATION, Debtor. The CARA CORPORATION, Plaintiff, v. CONTINENTAL BANK, Defendant.
CourtU.S. Bankruptcy Court — Eastern District of Pennsylvania

COPYRIGHT MATERIAL OMITTED

Melvin Lashner, Philadelphia, PA, for debtor.

Andrew N. Schwartz, Philadelphia, PA, for Creditors' Committee.

Alan Gershenson, Blank, Rome, Comisky & McCauley, Philadelphia, PA, for Continental Bank.

Lewis Kates, Philadelphia, PA, special counsel to the debtor.

Andrea J. Pollack, New York City, for Irving Safra and Solomon R. Pollock.

Frederic Baker, Asst. U.S. Trustee, Philadelphia, PA, U.S. Trustee.

OPINION

DAVID A. SCHOLL, Bankruptcy Judge.

A. INTRODUCTION

CONTINENTAL BANK ("the Bank"), the Defendant in this lender-liability action brought by THE CARA CORPORATION ("the Debtor"), has filed a Motion seeking the entry of Summary Judgment in its favor ("the Motion"). The gravamen of this proceeding is the Debtor's claims that the Bank, the Debtor's major source of funding, failed to disclose to the Debtor that A.J. Wood Corp. ("Wood"), a large customer of the Debtor which was also a customer of the Bank, was in financial distress and that, as a result, the Debtor continued to do business with Wood to its financial disadvantage. The Debtor also alleges that the Bank profited financially due to the Debtor's continuity of business with Wood and hence at the expense of the Debtor.

We conclude as follows: (1) The lack of involvement of the Bank in the financial affairs of the Debtor negates the Debtor's claim that a fiduciary relationship existed between it and the Bank; (2) There is no evidence of any active misrepresentations by the Bank of Wood's financial condition or concealed knowledge of the Bank of fraudulent actions of Wood which might have given rise to liability of the Bank to the Debtor despite the absence of a fiduciary relationship between the two; (3) As a result, the Debtor is unable to withstand the Bank's Motion and its Complaint must be dismissed.

In light of this ruling, being cognizant that success in this proceeding is the linchpin of the Debtor's outstanding Fourth Amended Plan of Reorganization ("the Plan"), we are scheduling a status conference in this case on November 4, 1992, prior to November 30, 1992, the scheduled date of, inter alia, the trial of this proceeding and the date of a continued confirmation hearing in reference to the Plan.

B. HISTORY OF THE CASE

The Debtor filed the underlying voluntary Chapter 11 bankruptcy case on December 28, 1990. On January 4, 1991, the Debtor moved to "stay enforcement" of the Bank's security interest supporting its claim of about $250,000 against the Debtor on the grounds that (1) it had not had the Debtor execute a new security agreement in connection with the most recent loan, relying instead on the validity of a security agreement executed in connection with a prior, liquidated loan; and (2) the Bank was liable over to the Debtor in an amount in excess of its claim as a result of the Counterclaims arising from the lender-liability proceeding presently before us, which had been commenced on May 18, 1990, and was then pending in the Court of Common Pleas of Philadelphia County ("the CCP"). The Debtor demanded a jury trial in this proceeding when it was filed.

The Bank responded by opposing this motion and by filing a motion of its own, on January 14, 1991, to enjoin the Debtor from using the Bank's cash collateral. At the close of a hearing of January 24, 1991, we expressed skepticism about the merits of the Debtor's position that the Bank did not have a valid security interest and its contention that it could use the Bank's cash collateral without an Order of this court. Accordingly, the Debtor and the Bank negotiated a temporary cash collateral agreement which has been periodically renewed through November 30, 1992. This truce has, however, remained uneasy. The instant proceeding attacking the Bank's claim on the basis of lender liability remains unresolved. Also, the Debtor has filed an Objection ("the Objection") to the Bank's secured claim, in which it continues to argue, despite this court's expressed skepticism, that its failure to execute a renewed security agreement when the most recent loan was made renders the Bank's security interest invalid. The hearing on the Objection has also been carried over to November 30, 1992, along with the hearing to consider renewal of cash collateral and confirmation of the Plan.

In filings of February 15, 1991, the Debtor also challenged the constituency, and the choice of counsel of, the Official Unsecured Creditors' Committee ("the Committee") appointed in the case. Specifically, the Debtor attacked the presence of Robert Borsari, a former sales representative of the Debtor whom the Debtor claimed had violated certain conditions of his employment contract in taking a similar position with a competitor, as chairman of the Committee. Counsel for the Committee was challenged because certain members of counsel's firm had recently left the firm of the Debtor's counsel under terms which resulted in hard feelings and pending litigation. The Objection to the Committee's counsel was withdrawn when it was agreed that the members of the firm of counsel to the Committee with which the Debtor's counsel was having a dispute would not participate in this case. Borsari was allowed to remain on the Committee by our Order of April 3, 1991.

On April 1, 1991, the Debtor filed a proceeding, Adversary No. 91-0222S, seeking monetary damages against Borsari and his new employer for breach of Borsari's employment contract with the Debtor ("the Borsari Case"). Shortly thereafter, the Debtor also filed its initial Plan of Reorganization on April 16, 1991.

Meanwhile, the instant proceeding was removed from the CCP to the district court by the Debtor on February 13, 1991.1 On February 22, 1991, Lewis Kates, Esquire, who apparently had been working on this proceeding while it was in the CCP, was appointed as the Debtor's special counsel to continue to pursue the proceeding. The proceeding was ultimately transferred to this court, while the parties were in the midst of discovery, by apparent agreement of the parties and Order of the district court of November 26, 1991.

While the Debtor still remains in its business of computer processing and software development at a sharply-reduced level from its pre-bankruptcy state, it soon became obvious that its principal means of funding a plan were with the anticipated proceeds of its two pending pieces of major litigation: the Borsari case and this proceeding. In fall, 1991, with significant assistance from the Honorable Judith H. Wizmur of the District of New Jersey, the Borsari Case was settled by an agreement of the Defendants to pay the Debtor $75,000.

However, the differences between the Debtor and the Committee resurfaced over the issue of how the instant proceeding should be approached. On December 13, 1991, the Committee filed its initial competing plan of reorganization ("the Committee Plan"). The Committee Plan featured a settlement with the Bank whereby the Bank would agree to allow its claim to be reclassified as an unsecured claim. In its final form, the Committee Plan contemplated a dividend of about ten (10%) percent to all creditors, including the Bank, paid mostly from the proceeds of the settlement of the Borsari Case. By way of contrast, the Debtor's series of plans all contemplated litigation of the instant proceeding and payment of all creditors (including what would hopefully be slim, if any, remains of the Bank's claim) in full with the anticipated proceeds.

Hearings to consider Disclosure Statements accompanying the competing Plans of both the Debtor and the Committee and a status hearing on this proceeding were all scheduled on January 29, 1992. There, it was agreed by the parties that the Committee's Plan would first proceed to a confirmation hearing, since its confirmation would end both the proceeding and the Debtor's need to pursue a Plan. A confirmation hearing on the Committee's Plan was therefore tentatively scheduled on April 1, 1992, and status hearings on the Debtor's Plan and this proceeding were carried over to that date as well.

As it developed, the majority in number and amount of unsecured creditors voting rejected the Committee's Plan. The Committee nevertheless pressed for a hearing to attempt to cram down its Plan upon its own purportedly-unenlightened constituency. After briefing, we denied confirmation of this Plan on April 27, 1992, holding that the Committee was acting in violation of its fiduciary duties and, ultimately, of 11 U.S.C. §§ 1129(a)(3), 1129(b)(1) in attempting to cram down a plan rejected by the very body which it was appointed to represent. Our Order of April 27, 1992, published at 1992 WL 88189 ("Cara I"), also scheduled a status hearing on the Disclosure Statement accompanying the Debtor's Plan, on the Debtor's still-outstanding Objection to the Bank's security interest, and on this proceeding on April 29, 1992.

As a result of colloquies at the status hearings of April 29, 1992, we issued two Orders dated May 1, 1992. One related solely to the Debtor's then-outstanding Third Amended Disclosure Statement accompanying its Third Amended Plan of Reorganization. Therein, we sustained certain Objections to the Third Amended Disclosure Statement, but allowed the Debtor to file a corrective Fourth Amended Plan and Disclosure Statement by May 8, 1992. We also continued the hearing on the stillpending Objection to the Bank's secured status to the projected date of a hearing to consider confirmation of a Fourth Amended Plan on July 1, 1992.

In Cara I, slip op. at *2, we suggested that the Debtor may have waived its right to a jury trial in this proceeding by removing it to this court, citing In re Hallahan, 936 F.2d 1496, 1505-06 (7th Cir.1991); ...

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