In re Carolina Steel Corp., Bankruptcy No. 93 B 44305 (JLG).

• Decision Date: 24 March 1995
• Docket Number: Bankruptcy No. 93 B 44305 (JLG).
• Citation: 179 BR 413
• Parties: In re CAROLINA STEEL CORPORATION, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

179 B.R. 413 (1995)

In re CAROLINA STEEL CORPORATION, Debtor.

Bankruptcy No. 93 B 44305 (JLG).

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

March 24, 1995.

Anderson Kill Olick & Oshinsky, P.C., New York City, for Jackson Nat. Life Ins. Co.

Ellery E. Hill, Jr., Knoxville, TN, for claimants.

JAMES L. GARRITY, Jr., Bankruptcy Judge.

Jackson National Life Insurance Company ("Jackson National"), on behalf of Carolina Steel Corporation ("Carolina"), a reorganized debtor, objects to the $6 million general unsecured claim (the "Claim") timely filed on behalf of Reclamation Services, Inc. ("Reclamation Services") and its President, David Comer (collectively "the Claimants"), and seeks entry of an order pursuant to 11 U.S.C. § 502 disallowing and expunging the Claim. For the reasons stated below, we find that the Claim should be expunged and disallowed in its entirety.¹

Facts

The underlying facts are not in dispute. See Tr. at 67-75.² Pursuant to agreements dated on or about September 20 and November 9, 1989, respectively (the "Sublease Agreements"), Reclamation Services subleased certain buildings located in Knoxville, Tennessee, from Carolina.³ In June 1991, Reclamation Services was in default under those agreements and on July 30, 1991, Carolina filed a Detainer Warrant in the General Sessions Court for Knox County, Tennessee. At a hearing held on September 3, 1991, Reclamation Services admitted that it was in default under the Sublease Agreements and judgment in favor of Carolina was entered for possession, back rent and unpaid utility bills. The parties negotiated an accord and satisfaction of that judgment and Reclamation Services' sub-tenancy was continued subject to its faithful compliance with its obligations under the Sublease Agreements. It breached that accord and Carolina filed a Writ of Possession on January 16, 1992. A second Detainer Warrant was filed on July 31, 1992.

Claimants and Diane Comer, d/b/a Central Recycling, then commenced an action against Carolina in the Chancery Court of Knox County, Tennessee (the "State Court Action"). In substance, their complaint (the "State Court Complaint") alleges that (i) Claimants subleased the buildings intending to sub-sublease them to third parties, (ii) Carolina knew that fact, (iii) Carolina knew that latent, undiscoverable defects in the buildings rendered them unfit for Claimants' intended use, and (iv) Carolina intentionally withheld that information from Claimants. The complaint seeks compensatory and punitive damages aggregating $6 million and a discharge from defaulted and future obligations under the Sublease Agreements. It alleges the following causes of action:

(i) fraud and fraud in the inception and fraud in the inducement;

(ii) anticipatory breach of the Sublease Agreements;

(iii) commercial impracticability;

(iv) false pretenses;

(v) breaches of the Sublease Agreements;

(vi) intentional infliction of economic and emotional distress; and

(vii) intentional omission and misrepresentation of material facts.

On September 28, 1992, Carolina answered the complaint and asserted a Counter Complaint against the Claimants to recover unpaid rent and utility payments, and possession of the buildings. Claimants failed to answer the Counter Complaint. On or about December 1, 1992, Carolina moved for the entry of an order of possession of the buildings. That motion was granted on December 3, 1992, and the court directed Reclamation Services to vacate the premises on or before January 26, 1993.

The State Court Action was set for trial on January 26, 1993. That day, Claimants moved by oral notice in open court pursuant to Rule 41.01 of the Tennessee Rules of Civil Procedure⁴ to dismiss the complaint, without prejudice. The motion was granted and the decision was memorialized in the Chancery Court's February 9, 1993 order. In response to Claimants' motion, Carolina moved by oral motion pursuant Rule 12.03 of the Tennessee Rules of Civil Procedure⁵ for the entry of judgment on its Counter Complaint. On the record of those proceedings, Claimants' counsel confessed judgment for unpaid rent and utility obligations owing to Carolina in the sum of $96,066.45. The confession of judgment is reflected in the February 9 order. In March 1993, the Claimants unsuccessfully moved the Chancery Court to reconsider that aspect of the February 9 order.

Section 28-1-105(a) of the Tennessee Code Annotated is commonly known as the "Tennessee Savings Statute." See Banks v. Dement Constr. Co., 817 S.W.2d 16, 18 (Tenn. 1991); Bennett v. Town & Country Ford, Inc., 816 S.W.2d 52, 53 (Tenn.Ct.App.1991). In part it states that "if an action is commenced within the time limited in a rule or statute of limitation, but the judgment or decree is rendered against the plaintiff upon any ground not concluding his right of action . . . the plaintiff . . . may, from time to time, commence a new action within one (1) year of the judgment or decree . . .". This provision applies to actions dismissed pursuant to Rule 41.01. See Bennett v. Town & Country Ford, Inc., 816 S.W.2d at 52; Turner v. N.C. & St. L. Ry., 199 Tenn. 137, 285 S.W.2d 122 (1955). The parties agree that to preserve the claims alleged in the State Court Complaint, the Claimants were required to refile that complaint on or before February 9, 1994. See Tr. at 20. On August 24, 1993, an involuntary petition pursuant to chapter 11 of the Bankruptcy Code ("Code") was filed against Carolina. On October 4, 1993, Carolina, Carolina Steel Holdings, Inc., and CSC Concrete Company filed separate voluntary petitions for relief under chapter 11 of the Code and Carolina filed a Notice of Consent to Entry of an Order for Relief under chapter 11 of the Code. On January 25, 1994, without seeking leave of this Court, Claimants' counsel refiled the State Court Complaint. On February 24, 1994, counsel timely filed the Claim.

Discussion

Although the Bankruptcy Code provides the mechanism for enforcing creditor rights, those rights are a creation of state law. Matter of Chicago, Milwaukee, St. Paul, and Pacific R. Co., 791 F.2d 524, 532 (7th Cir.1986); In re Johnson, 120 B.R. 461, 468 (Bankr.N.D.Ind.1990). Thus, in § 502 litigation the validity of a claim is determined by reference to state law. In re Johnson, 756 F.2d 738, 741 (9th Cir.1985), cert. denied Johnson v. Righetti, 474 U.S. 828, 106 S.Ct. 88, 88 L.Ed.2d 72 (1985). The Sublease Agreements were negotiated and executed in Tennessee and each provides that it will be construed under Tennessee law. See September 20 Sublease Agreement at ¶ 18, November 9 Sublease Agreement at ¶ 18. Accordingly we will apply that law in assessing the merits of the Claim. Compare In re Burger, 125 B.R. 894, 900 (Bankr.D.Del.1991) (claim predicated on alleged breach of contract is determined by Delaware law where contract provided that it would be construed in accordance with Delaware law). Jackson National contends that Claimants' acted in violation of § 362 by refiling the State Court Complaint without first obtaining leave of this Court. They contend that Claimants' action was void ab initio and, as such, that the Claim is time barred by § 28-1-105(a). Section 108(c) of the Bankruptcy Code states, in relevant part, as follows:

Except as provided in section 524 of this title, if applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period for commencing or continuing a civil action in a court other than the bankruptcy court on a claim against the debtor . . . and such period has not expired before the date of the filing of the petition, then such period does not expire until the later of —

(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or

(2) 30 days after notice of the termination or expiration of the stay under section 362 . . . of this title . . . with respect to such claim.

11 U.S.C. § 108(c). We are not aware of any provision under Tennessee law which, in this case, would suspend the one (1) year period under § 28-1-105(a). However, because the automatic stay has remained in effect with respect to the State Court Action since the commencement of Carolina's chapter 11 case, the period under § 28-1-105(a) has been tolled. See 11 U.S.C. § 108(c)(2).⁶ The Claim is not time barred under Tennessee law.⁷

The Claim consists of a Standard Form Proof of Claim which annexes the State Court Complaint, together with the exhibits thereto. During the hearing, Claimants explained that notwithstanding the allegations contained in the complaint, the gravamen of the Claim is that by failing to disclose latent defects in the buildings, Carolina fraudulently induced Claimants to enter into the Sublease Agreements. See Tr. at 77-78. They contend that Carolina failed to disclose the following: (i) water pipes in the demised buildings had frozen and burst; (ii) water service to each of those buildings had been discontinued; (iii) the buildings were not in compliance with applicable local fire codes or regulations because the sprinklers were inoperable, and (iv) after heavy rains water pooled in certain of the buildings. See Tr. at 76-77, 95. Carolina admits that it knowingly failed to disclose defects in the buildings to Claimants. Aldridge Dep. at 120, 123, 124, 126.⁸ Nonetheless, Jackson National contends that because Carolina had no duty to disclose those defects, its failure to do so cannot sustain Claimants' assertion that Carolina fraudulently induced them to enter into the Sublease Agreements.

The elements of a cause of action for fraud are:

1. a knowing or reckless misrepresentation of a material fact;

2. reasonable reliance by the plaintiff on the misrepresentation; and

3. damages to the plaintiff as a direct result of that misrepresentation.

E.g., Hill v. John Banks Buick, 875 S.W.2d 667, 670 (Tenn.Ct.App.1993) (citing Oak Ridge Precision Industries, Inc. v. First Tennessee Bank...