In re CMC Electronics Corp.

Decision Date20 December 1993
Docket Number503.,Bankruptcy No. 87-01297-293. Claim No. 502
Citation166 BR 386
PartiesIn re CMC ELECTRONICS CORPORATION, Debtor.
CourtU.S. Bankruptcy Court — Eastern District of Missouri

Arthur C. Unger, Westbury, NY, Trustee.

Joel A. Kunin, East St. Louis, IL, for trustee.

Phillip K. Gebhardt, St. Louis, MO, for claimants.

Peter D. Kerth, Clayton, MO.

MEMORANDUM OPINION

DAVID P. McDONALD, Bankruptcy Judge.

JURISDICTION

This Court has jurisdiction over the parties and subject matter of this proceeding pursuant to 28 U.S.C. §§ 1334, 151, and 157 and Local Rule 29 of the United States District Court for the Eastern District of Missouri. This is a "core proceeding" pursuant to 28 U.S.C. §§ 157(b)(2)(A) and (B) which the Court may hear and determine.

PROCEDURAL BACKGROUND

(1) R & T Development Company (R & T) filed proof of claim number 502 against the estate of CMC Electronics Corporation (CMC). The proof of claim sought payment of $126,326.88 due under a lease and indicated that R & T Development Company is a partnership comprised of Wayne Stephenson and Kent Friedman.

(2) The trustee objected to R & T's claim arguing that it failed to:

(a) "provide adequate information to establish a prima facie claim";
(b) "establish the amount due and owing after mitigation of damages by subsequent sale, lease, or other disposition of the subject property"; and
(c) "establish that the amount of the alleged claim is allowable."

(3) R & T filed a response to the trustee's objection, which included the calculations used to determine extent of the claim. R & T's response also asked the Court to find that $3,679.67 of its claim qualified for administrative expense status. Thirdly, R & T responded to the trustee's objection stating that under Bankruptcy Rule 3001(f) a properly executed and filed proof of claim "constitutes prima facie evidence of the validity and amount of the claim."

(4) The trustee amended his objection to claim 502 and asserted that the claim was subject to equitable subordination. The trustee reasoned that because R & T's partners, Kent Friedman and Wayne Stephenson, were insiders of CMC the terms of the lease between CMC and R & T were not negotiated at arms' length. The trustee maintained that because the lease rate was not the result of arms' length negotiation, section 510 of the Bankruptcy Code applied.1

(5) BW Development Company (BW) filed proof of claim number 503 against the CMC's estate. Proof of claim 503 sought payment of $225,015.22 due under a lease and indicated that BW Development Company is a partnership comprised of Wayne Stephenson and Byrle Northup.

(6) The trustee objected to BW's claim arguing that Proof of Claim 503 failed to:

(a) "provide adequate information to establish a prima facie claim";
(b) "establish the amount due and owing after mitigation of damages by subsequent sale, lease, or other disposition of the subject property"; and
(c) "establish that the amount of the alleged claim is allowable."

(7) BW filed a response to the trustee's objection, which included the calculations used to determine extent of its claim. The response also indicated the extent to which BW had mitigated the damages it incurred as a result of CMC's rejection of the lease between it and BW. Thirdly, BW responded to the trustee's objection stating that, under Bankruptcy Rule 3001(f), a properly executed and filed proof of claim "constitutes prima facie evidence of the validity and amount of the claim" and that claim 503 set forth "facts sufficient to establish a prima facie claim under" that rule.

(8) The trustee amended his objection to claim 503 and asserted that the claim was subject to subordination under either of two theories. The trustee first argued that the terms of CMC's plan of reorganization precluded payment of BW's claim. The trustee's amended objection to claim number 503 argued that because Byrle Northup was an equity security holder of CMC and because the plan provided for the subordination of the claims and interests of CMC's equity security holders, the Court should subordinate BW's claim under the plan as one belonging to an equity security holder.

Second, the trustee maintained that section 510 of the Bankruptcy Code applied to equitably subordinate claim 503 to the claims of all other creditors. To support this position, the trustee reasoned that because BW's partners, Byrle Northup and Wayne Stephenson, were insiders of CMC the terms of the lease between CMC and BW were not negotiated at arms' length. The trustee maintained that because the lease rate was not the result of arms' length negotiation Section 510 of the Bankruptcy Code applied.2

(9) Following a motion from R & T, the Court held a single hearing on claims 502 and 503. The trustee's attorney argued that the terms of the confirmed plan, which precluded payment of the claims and interests of insiders of CMC (class 6 parties), barred the payment of the claims that R & T and BW had filed. The Court orally ruled that the two partnerships did not qualify as class 6 claimants under the plan of reorganization and that the plan did not bar payment of claims 502 and 503. The trustee asked the Court to reconsider its oral ruling and the Court agreed to accept briefs from the parties addressing the issue of whether the provisions of class 6 of the plan includes the two partnerships.

The trustee's attorney asked the Court to continue the hearing with regard to claim 503 but agreed to try claim 502. After the Court heard testimony from R & T's principals it agreed to allow the parties to include, in their post-trial briefs, issues besides the question of BW and R & T's inclusion in class 6 under the plan. Specifically, the Court agreed to consider arguments relating to both the allowability of R & T's claim and whether any portion of that claim qualifies for administrative expense status.

(10) The trustee and R & T each filed post-trial briefs3 in accord with the Court's instruction. BW did not file a brief. Counsel for R & T also represents BW and because the issue of membership in class 6 is the same for both partnerships, a brief from BW would echo the arguments R & T asserts. That part of this decision dealing with whether a partnership comprised of insiders belongs in class 6 of the plan will bind BW too.

FACTUAL BACKGROUND

After considering the entire record, the Court makes the following findings of fact:

(1) Kent Friedman was CMC's President in February of 1986. At that time he owned 500 shares of CMC stock.4

(2) Wayne Stephenson worked for CMC from 1978 through September of 1985 when he resigned his post with the company. From November 1985 through November 1986, Mr. Stephenson served as a paid consultant to CMC. In October of 1987, Mr. Stephenson rejoined the Debtor as an employee and remained in that capacity until November of 1987. In 1986, Mr. Stephenson owned 24,000 shares of CMC stock.

(3) Mr. Stanton stated in his opening statement at the hearing on claims 502 and 503 that Byrle Northup owned 1,239,520 shares, or 52% of the Debtor's equity, on the date CMC filed its bankruptcy petition. The trustee did not submit any formal proof of this but BW and R & T concede that Kent Friedman, Wayne Stephenson and Byrle Northup were equity security holders of CMC.

(4) Mr. Friedman and Mr. Stephenson formed R & T Development Company, a partnership organized under the laws of the State of Missouri. R & T owned improved, real property in Buford, Georgia that it leased to CMC.

(5) Mr. Northup and Mr. Stephenson formed BW Development Company, a general partnership. BW owned improved, real property in Arlington, Texas that it leased to CMC.

(6) After CMC filed its bankruptcy petition in this Court, the trustee appointed to the case rejected the leases CMC had with R & T and BW.

DISCUSSION

The Debtor's plan of reorganization defines class 6 as "the Interests of Debtor's equity security holders and Claims of Debtor's equity security holders, including, without limitation, the claim of Gail A. Northup/Fyhrie under the Northup promissory note." The Debtor's plan of reorganization further provides that "holders of Class 6 Allowed Claims and Interests shall receive no amount under the Plan."

The trustee maintains that BW and R & T's claims fall within the scope of class 6 of the reorganization plan. To support this position, the trustee points the Court to the law of partnership in Missouri which does not recognize a partnership as a separate, legal entity. Counsel for the trustee argues that in Missouri neither R & T nor BW could sue to enforce the debts that underlie claims 502 and 503 and that because section 558 of the Bankruptcy Code preserves state law defenses for a debtor's use in bankruptcy, the partnerships should not be able to sue to enforce their rights in this Court. If the partnerships cannot maintain suits to recover the debts owed to them, then, the trustee reasons, the only way for them to collect the sums due to them under the leases is for the principals to bring suit. Unfortunately for the principals, they are equity holders of the debtor. This status, the trustee insists, bars their recovering anything from the Debtor's estate under the terms of the confirmed plan.

R & T argued in its post-trial filings that, under the Bankruptcy Code, a partnership is an entity separate and distinct from its principals, capable of filing a proof of claim against an estate. The partnership constructed a statutory argument to support its position. Counsel for R & T first directed the Court to section 501 of the Code which states that "(a) A creditor . . . may file a proof of claim . . ." and then invoked section 503 of the Code which provides that "(a) An entity may file a request for payment of an administrative expense." The partnership also cited section 101(9) of the Code which uses the word "entity" to define the term "creditor." Next, the partnership referred the Court to section 101(14)'s use of...

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