In re Clinton Street Food Corp.

• Court: U.S. Bankruptcy Court — Southern District of New York
• Writing for the Court: STUART M. BERNSTEIN
• Citation: In re Clinton Street Food Corp., 254 B.R. 523 (Bankr. S.D.N.Y. 2000)
• Decision Date: 28 March 2000
• Docket Number: Bankruptcy No. 93-B-43200 (SMB1) to 93-B-43204 (SMB1). Adversary No. 98-9294A.
• Parties: In re CLINTON STREET FOOD CORP., Trenco Food Corp., Grandco Food Corp., Penco Food Corp. and Penco Supermarkets, Inc., Debtors. Ian Gazes, Chapter 7 Trustee of Penco Food Corp., Plaintiff, v. Phillip DelPrete, The Maui Pineapple Co., Inc., Rudy Fuertes, Harry Laufer, Robert Zorn, and Sanford Goldberg, Defendants.

254 B.R. 523 (2000)

In re CLINTON STREET FOOD CORP., Trenco Food Corp., Grandco Food Corp., Penco Food Corp. and Penco Supermarkets, Inc., Debtors Ian Gazes, Chapter 7 Trustee of Penco Food Corp., Plaintiff, v. Phillip DelPrete, The Maui Pineapple Co., Inc., Rudy Fuertes, Harry Laufer, Robert Zorn, and Sanford Goldberg, Defendants.

Bankruptcy Nos. 93-B-43200 (SMB1) to 93-B-43204 (SMB1). Adversary No. 98-9294A.

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

March 28, 2000.

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Jaffe & Asher, LLP (Mark H. Moore, of Counsel), New York City, for Defendant Robert Zorn.

Paul, Weiss, Rifkind, Wharton & Garrison (Jeffrey D. Saferstein, of Counsel), New York City, for Chapter 7 Trustee.

Gerson, Wood & Blakeman, LLP (Ralph Wood, of Counsel), New York City, for Defendants Philip DelPrete and The Maui Pineapple Co., Inc.

Sanford Goldberg, New York City, Pro Se.

Gersten, Savage & Kaplowitz, LLP (Steven R. Popofsky, of Counsel), New York City, for Defendant Rudy Fuertes.

MEMORANDUM DECISION GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTIONS TO DISMISS AMENDED COMPLAINT

STUART M. BERNSTEIN, Chief Judge.

This adversary proceeding involves claims arising from an allegedly rigged bankruptcy auction. Ian Gazes, the chapter 7 trustee of the above-captioned debtors, seeks to recover damages on behalf of the estate of Penco Food Corporation ("Penco"), contending that the named defendants' secretly colluded to control the sale price of Penco's assets. His claims include fraud, "fraud on the court" and fraudulent concealment.

One of the defendants, Robert Zorn, has moved to dismiss the trustee's amended complaint. Defendants Sanford Goldberg, Rudy Fuertes, Harry Laufer, Philip DelPrete and The Maui Pineapple Co., Inc. ("Maui") have joined in Zorn's motion, and DelPrete and Maui have also moved for summary judgment. For the reasons discussed below, the motions are granted in part and denied in part.

BACKGROUND

A. The Amended Complaint

As this is a motion to dismiss, we must begin with the allegations in the amended complaint which, standing alone, are straightforward. On or about June 17, 1993, Penco and certain affiliated companies filed separate voluntary petitions for protection under chapter 11 of the Bankruptcy Code. (Amended Complaint, dated Nov. 11, 1999, at ¶ 5.) Judge James L. Garrity, Jr. converted the cases to chapter 7 on October 15, 1993, and the plaintiff was appointed the chapter 7 trustee. (Id.)

In or about December of 1993, the trustee entered into a written agreement to sell certain of Penco's assets to the defendant Rudy Fuertes for $300,000.00, subject to higher and better offers. (Id., ¶ 9.) At a January 7, 1994 hearing (the "Sale Hearing"), the trustee sought approval of that sale. (Id., ¶ 11.) Unbeknownst to the trustee, Del Prete, a representative of Maui, had agreed to pay the defendants Fuertes, Laufer and Zorn $50,000.00, $50,000.00 and $70,000.00, respectively, not to bid. (Id., ¶ 13.) The defendant Goldberg participated in these discussions, and was aware of the conspiracy. (Id.) The individual defendants failed to disclose the scheme to the trustee, (id., ¶ 14), and also failed to disclose it to the bankruptcy court even though Judge Garrity expressly asked the defendants and their counsel at the Sale Hearing "whether they were aware of the existence of any agreement to control the sale price."¹ (Id., ¶ 15.)

As a result of these undisclosed agreements, Maui bid $320,000.00, no one else bid, and Maui's bid was accepted. (Id., ¶ 17.) In fact, the assets were worth at least $2 million. (Id., ¶ 18.) By order dated March 24, 1994 (the "Sale Order"), Judge Garrity approved the sale to Maui for $320,000.00, (id., ¶ 17), and the Sale Order is final.

B. The Releases

Several of the parties contend that they have been released from the claims asserted by the trustee. The origin and scope of releases entails consideration of two adversary proceedings otherwise unrelated to the trustee's instant action.

On or about June 22, 1993 (prior to conversion of these cases to chapter 7), the debtors commenced an adversary proceeding against DiGiorgio Corporation, three of its divisions — White Rose Food, White Rose Dairy and White Rose Frozen Food — and W.R. Service Corp. The debtors challenged the validity, priority and extent of their liens on the debtors' assets, and sought $2 million in compensatory and punitive damages as well as subordination of their claims. By stipulation dated May 5, 1995 (the "5/95 Stip."), the trustee and the defendants settled their litigation. As part of that settlement, the trustee gave the defendants the following release:

The Trustee hereby releases and forever discharges the Defendants of and from any and all actions or causes of action, suits, debts, grievances, claims, complaints, contracts, controversies, agreements, promises, damages, cross-claims, claims for contribution or indemnity, claims for attorneys\' fees, judgments, and demands whatsoever, in law or in equity, which against the Defendants the Trustee ever had, now has or shall have, including, but not limited to, any claims under the Bankruptcy Code or any other statute under State Law, or violation of any other local, state or federal law, regulation or ordinance having any bearing whatsoever on Trustee\'s relationship or obligations to the Defendant which Trustee ever had, now has or shall have. The Parties understand all matters pending between the Trustee and Defendants, and this Stipulation and General Release fully executed on behalf of the Parties, the Trustee will have complete satisfaction of any and all claims, whether known, suspected, or unknown, that they may have had against Defendants from the beginning of the world ad infinitum. The Trustee hereby waives any and all remedies and relief not explicitly provided for herein.

(5/95 Stip., ¶ 5)(emphasis added.) "Defendants" are defined in the 5/95 Stip. to include both the named defendants as well as "their predecessors, successors, their current and former assigns, affiliates and their current and former partners, officers, directors, shareholders, employees and agents . . ., in their official, representative and individual capacities." (Id., ¶ 2.) Zorn was (and still is) the Senior Vice President and Chief Financial Officer of White Rose, and hence, appears to be a beneficiary of the release. Judge Garrity "so ordered" the 5/95 Stip. on July 12, 1995, and that order was never appealed, vacated or modified.

In October of 1993, R. Best Produce, Inc. ("R. Best") commenced an adversary proceeding against the debtors to recover amounts allegedly due under the Perishable Agricultural Commodities Act. The trustee settled that litigation in accordance with the terms of a May 1994 stipulation (the "5/94 Stip.") that, among other things, released R. Best, together with its "current and former officers, directors, shareholders, employees and agents . . . in their official, representative and individual capacities" from:

any and all obligations, claims and demands of any kind whatsoever, at law or in equity, known or unknown, discovered or undiscovered except as set forth therein.

(5/94 Stip., ¶¶ 4, 9.) By the time of the 5/94 Stip., defendant DelPrete had left Maui and was employed by R. Best. Thus, he appears to be a beneficiary of the release. Judge Garrity "so ordered" the 5/94 Stip. on June 30, 1994, and that order was never appealed, vacated or modified.

C. This Adversary Proceeding

The resolution of the pending motions also requires consideration of the procedural history of this adversary proceeding. On or about April 17, 1997, the trustee retained Paul, Weiss as his special counsel to bring this adversary proceeding, but it was not commenced until October 5, 1998, or more than one year later. The original complaint contained four causes of action — fraud, "fraud on the court," violation of § 363(n) of the Bankruptcy Code² and fraudulent concealment. It alleged the same wrongdoing as the current amended complaint with some language differences. Each of the defendants either answered the complaint or moved to dismiss it. On January 20, 1999, Judge Garrity conducted a status conference at which the parties agreed that the trustee would disseminate a proposed amended complaint to the defendants in an effort to obtain their consent to the filing of that document. Absent their unanimous consent, the trustee was free to move for leave to amend the complaint, which he ultimately did on February 3, 1999.

The proposed amended complaint contained the same four claims for relief, but added and/or modified certain factual allegations. In a May 17, 1999 decision and a July 9, 1999 order, Judge Garrity granted the trustee leave to amend the complaint, except for claims under § 363(n) of the Bankruptcy Code which were time-barred under Fed.R.Civ.P. 60(b)(3):³

Section 363(n) supplements the general powers of a court to avoid a sale by giving the trustee the right to do so if the sale price is the product of bid rigging. See Robertson v. Isomedix, Inc. (In re International Nutronics, Inc.), 28 F.3d 965, 969 (9th Cir.1994) (citing 2 Collier on Bankruptcy ¶ 363.14 (15th ed. rev.1998)). Nonetheless, § 363(n) is subject to the rules governing the finality of judgments. Thus, because the Trustee is seeking to avoid the Sale Order by reason of defendants\' alleged fraud, we characterize this § 363(n) claim as a motion under Rule 60(b)(3), and apply its one year statute of limitations. See id.; 3 Collier on Bankruptcy § 363.12 (15th ed. rev\'d 1998); 9A Am. Jur.2d Bankr.§ 1636 (1991). The Trustee commenced this action more than one year after the entry of the order approving the Asset Sale. Thus, the Trustee is time-barred pursuant to Rule 60(b)(3) from asserting a claim under § 363(n), and we will not permit him to amend the complaint to assert that claim.

See Gazes v. Del Prete et al. (In re Clinton Street...