In re Clinton Centrifuge, Inc., Bankruptcy No. 86-03950F.
| Decision Date | 28 April 1987 |
| Docket Number | Bankruptcy No. 86-03950F. |
| Citation | 72 BR 900 |
| Parties | In re CLINTON CENTRIFUGE, INC., Debtor. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
Jonathan Ganz, H. Marvin Mercer, III, and Lewis Kates, Kates and Mazzicone, Philadelphia, Pa., co-counsel for debtor, Clinton Centrifuge, Inc.
Melvin Lashner, J. Scott Victor, Lashner, Victor & Maschmeyer, Philadelphia, Pa., and Gregory L. Sturn, Harris & Harris, Warrington, Pa., for movants, Aaron M. Lavin, A.M. Lavin Machine Works, Inc. and Lavin Centrifuge, Inc.
On August 21, 1986, the debtor, Clinton Centrifuge, Inc., filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. On December 2, 1986, three creditors filed a motion to vacate the order for relief, asserting that the bankruptcy petition was filed in bad faith. An evidentiary hearing was held on the motion on January 7, 1987.
For the reasons set forth below, the motion will be denied.
1. A.M. Lavin Machine Works, Inc. ("Machine Works") is a Pennsylvania corporation with its principal office at 3500 Davisville Road, Hatboro, Pennsylvania.
2. Aaron M. Lavin ("Lavin"), an individual residing at 3500 Davisville Road, Hatboro, Pennsylvania, is the sole stockholder and principal officer of Machine Works.
3. Lavin Centrifuge, Inc. ("Lavin Centrifuge") is a Pennsylvaina corporation with its principal place of business at 220 Jacksonville Road, Hatboro, Pennsylvania.
4. William D. Clinton, ("Clinton") is an individual residing at 313 Custis Road, Glenside, Pennsylvania.
5. Clinton Centrifuge, Inc., ("Clinton Centrifuge") is a Pennsylvania corporation with its registered office at 313 Custis Road, Glenside, Pennsylvania.
6. In 1980, Machine Works was engaged in the assembly, manufacture, sale and repair of basket-type centrifuges and other equipment, as well as the sale of certain spare parts.
7. Sometime in mid-1980, Lavin decided to sell his business, and Clinton became aware of this decision.
8. On October 10, 1980, Lavin and Machine Works entered into a written agreement with Clinton and Lavin Centrifuge, a corporation Clinton agreed to incorporate for the purpose of purchasing the assets
and conducting the business of Machine Works.
9. Under the agreement Lavin Centrifuge agreed to purchase Lavin Machine Works for:
a. $100,000.00 cash at settlement;
b. $1,000,000.00 balloon payment, payable on or before October 1, 1990, evidenced and secured by a judgment note;
c. minimum royalties of $120,000.00 per annum for ten years, payable at a monthly rate of $10,000.00 for 120 months; and
d. additional royalties payable each year of 3% of net sales over $1,000,000.00 per annum and payments to Machine Works of $85,403.00 plus interest, payable in fifty (50) equal monthly debt service payments of $2,000.00.
10. Lavin also agreed to rent to Lavin Centrifuge his industrial plant for the "net" rate of $2,000.00 per month on a month-to-month basis, and also to make available to Clinton a $100,000.00 line of credit for working capital funds to be advanced to Lavin Centrifuge.
11. The agreement also provides, in other pertinent part, with "CORPORATION" being Lavin Centrifuge:
CLINTON represents and warrant to LAVIN that from and after the closing, CLINTON will, until such time as all indebtedness under the terms of this Agreement is paid in full (whether or not there has been a default which has been cured pursuant to the terms hereof), maintain all of the shares of stock in the CORPORATION in escrow with Robert C.J. McKinstry, Owl Ridge Farm, Gardenville, PA 18962. In the event that the CORPORATION is in default and in the event that the said default is not cured within 180 days of written notice to the CORPORATION to cure the default, any and all stock held in escrow shall be delivered to LAVIN and LAVIN may in accordance with this Agreement have sufficient stock transferred from CLINTON to himself to cure said default-said stock being valued at its book value. CLINTON shall have a right thereafter within six (6) months to redeem said stock from LAVIN by curing the default. As long as CLINTON is not in default, CLINTON shall have the right to vote the stock and collect all dividends. However, in the event stock is transferred to LAVIN pursuant to the terms hereof, LAVIN shall have the right to vote the stock in his name and to collect all dividends issued on the stock in his name.
12. On October 14, 1980, Clinton caused Lavin Centrifuge to be incorporated, becoming its sole stockholder and chief executive officer.
13. On or about March 6, 1983, Clinton caused Clinton Centrifuge to be incorporated, and became its chief executive officer and sole stockholder.
14. Clinton Centrifuge was inactive until April 6, 1983.
15. On April 6, 1983, Clinton caused Lavin Centrifuge to sell all of its bulk assets, including inventory, equipment, accounts receivable, cash-on-hand, office furniture, pre-paid expenses, designs, drawings, engineering concepts, jigs, dies, fixtures, demonstration parts, assemblies, and patterns to Clinton Centrifuge in a bulk transfer in exchange for $135,787.00 in new consideration evidenced by a note payable in monthly installments over a five-year period.
16. Lavin Centrifuge mailed an original notice of bulk transfer to Lavin and Machine Works on or about March 25, 1983, and an amended notice of bulk transfer to Lavin and Machine Works on or about March 28, 1983, pursuant to Article 6 of the Pennsylvania Commercial Code.
17. After April 6, 1983, Lavin Centrifuge no longer made any sales or purchases, and no longer engaged in active business, although it remains a corporate entity with limited assets and extensive liabilities to Lavin and Machine Works.
18. On July 6, 1983, Aaron M. Lavin and A.M. Lavin Machine Works, Inc. commenced an action in equity, in the Court of Common Pleas of Montgomery County, No. 83-09836, to enjoin Lavin Centrifuge, Clinton Centrifuge, and Clinton from taking any actions inconsistent with the October 10, 1980 agreement.
19. On May 14, 1985, after four (4) days of trial, Judge Vogel of the Court of Common Pleas, entered an opinion, findings of fact, conclusions of law, and decree nisi, that held, inter alia:
a. that the bulk transfer of assets on April 6, 1983 from Lavin Centrifuge to Clinton Centrifuge be set aside as fraudulent pursuant to section 360 of the Fraudulent Conveyances Act, 39 P.S. Section 360;
b. that the transferred assets or their equivalent be returned to the control and dominion of Lavin Centrifuge;
c. that the profits generated by Clinton Centrifuge, as a result of its possession of the transferred assets, be returned to Lavin Centrifuge;
d. that ownership of all authorized and outstanding capital stock of Lavin Centrifuge be transferred and delivered to Lavin; and
e. that Lavin and Machine Works failed to prove that Clinton, Lavin Centrifuge and Clinton Centrifuge fraudulently misrepresented any facts concerning the agreement of sale among Lavin, Machine Works, Lavin Centrifuge and Clinton or concerning the April 6, 1983 bulk transfer.
20. On March 7, 1986, Judge Vogel entered a final decree on plaintiff's exceptions of May 24, 1985, and dismissed defendant's motion for post trial relief.
21. Clinton Centrifuge appealed the final decree of Judge Vogel to the Pennsylvania Superior Court.
22. On July 22, 1986, Judge Vogel entered an order on defendants' petition for stay pending appeal which ordered Clinton Centrifuge to post a bond with corporate surety in the sum of $225,000.00 within thirty (30) days of the order or the stay would be vacated.
23. The bond was never filed and a day after the expiration of the 30-day period this bankruptcy petition was filed.
24. Clinton has an unsecured claim listed on the schedules which is marked as undisputed in the amount of $10,300.00.
25. Guinard Centrifuge International is listed as a creditor in the undisputed amount of $22,400.000 for refunds of overcharges of administrative and consulting charges during 1985.
26. The law firm of Harris & Harris is listed as a creditor in the undisputed amount of $2,537.77.
27. Lavin is listed as a creditor with an unliquidated and disputed claim in excess of $134,000.00.
28. Wambold and Roberts, a CPA service, is listed as a creditor in the undisputed amount of $900.00.
29. Equipco, Inc. is a creditor with an undisputed claim of $9,608.99 and is listed on the debtor's amendment to schedules.
30. Clinton filed the chapter 11 bankruptcy in order to preserve the economic existence of Clinton Centrifuge, an ongoing business enterprise.
1. Clinton Centrifuge did not file this chapter 11 bankruptcy case in bad faith.
2. This bankruptcy case should not be dismissed under 11 U.S.C. § 1112(b).
This motion raises questions which have troubled bankruptcy courts for some time and which are by no means frivolous. Based upon the facts set forth above, which are largely undisputed, Lavin, Machine Works and Lavin Centrifuge request that this chapter 11 bankruptcy case be dismissed. The movants contend that the filing of the voluntary bankruptcy petition was a litigation tactic on the part of Clinton Centrifuge designed to allow it to continue to contest an adverse state court decision without complying with the requirement that it post a supersedeas bond. As such, according to the movants, the bankruptcy was filed in bad faith and should be dismissed pursuant to 11 U.S.C. § 1112(b).1
There is no express language in the Bankruptcy Code requiring that a chapter 11 petition be filed in good faith. Nevertheless, many courts have held that the absence of good faith constitutes "cause" for dismissal under section 1112(b). E.g., In re O'Loughlin, 40 B.R. 707, 709 (Bankr. D.Mass.1984); Matter of Northwest Recreational Activities, Inc., 4 B.R. 36, 39 (Bankr.N.D.Ga.1980). An implicit good faith requirement has also been found to exist based...
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