In re Commodore Business Machines, Inc.

Decision Date11 April 1995
Docket NumberBankruptcy No. 94 B 42187 (JLG). Adv. No. 94-9238A.
Citation180 BR 72
CourtU.S. Bankruptcy Court — Southern District of New York



Zalkin, Rodin & Goodman, New York City, for plaintiff Allen-Bradley Co., Inc.

Kaye, Scholer, Fierman, Hays & Handler, New York City, for defendant Commodore Business Machines, Inc.


JAMES L. GARRITY, Jr., Bankruptcy Judge.

Allen-Bradley, Inc. ("Allen-Bradley") commenced this adversary proceeding to impose a constructive trust upon the proceeds realized by Commodore Business Machines, Inc. ("Commodore") from the court authorized sale of its factory located in Norristown, Pennsylvania, the contents thereof, and the 13.5 acres of real property on which it sits. Hereinafter, the factory, its contents and real property collectively will be referred to as the "Site"; the real property separately will be referred to as the "Real Estate". Commodore has moved pursuant to Bankruptcy Rule 7012 and Fed.R.Civ.P. 12(b)(6) to dismiss the complaint. For the reasons stated below, the motion is granted.1


On May 4, 1994, an involuntary petition for relief under chapter 7 of the Bankruptcy Code ("Code") was filed against Commodore. On May 24, 1994, Commodore consented to entry of an order for relief under chapter 11 of the Code. Commodore has not operated post-petition, although pursuant to 11 U.S.C. §§ 1107 and 1108 it remains in possession and control of its assets as a debtor-in-possession. It is in the process of selling off its assets and has filed a liquidating plan of reorganization.

In 1974, Allen-Bradley owned the Site which it rented to MOS Technologies, Inc. ("MOS") pursuant to a lease dated November 1, 1970. Complaint ¶ 11.3 On January 31, 1975, MOS sold its business and assets (including the lease) to PJM Technology, Inc. ("PJM"). Thereafter, PJM changed its name to MOS Technology, Inc. ("MOS II"). Complaint ¶ 13. Pursuant to a Stock Acquisition Agreement dated November 2, 1976, Commodore purchased all of MOS II's stock. In 1978, Allen-Bradley sold the Site to MOS II. Complaint ¶¶ 14-15. In September 1979, the Environmental Protection Agency (the "EPA") began an investigation into possible groundwater contamination at the Site resulting from a release of Trichloroethylene ("TCE") believed to have occurred in or about 1974. Complaint ¶ 15. In 1980, MOS II merged with Commodore. Complaint ¶ 14. The Site was placed on the EPA's National Priority List in 1987. Complaint ¶ 16. On or about October 9, 1992, the EPA issued a letter to Allen-Bradley notifying it that the EPA had determined it and Commodore to be responsible for the remediation of the groundwater contamination at the Site. That letter also demanded reimbursement of the EPA's past and future response costs. Complaint ¶ 17. On or about June 29, 1993, the EPA issued an administrative order pursuant to § 106(a) of the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. § 9606(a), directing the parties to implement its September 29, 1992 Record of Decision for remediating the Site and to comply fully with the terms of that order. Complaint ¶ 18. On or about August 31, 1993, the EPA filed a lien against the Site to secure payment of certain remediation expenses it had incurred at the Site. See Complaint ¶ 27.

In 1993, Commodore sued MOS's insurer, Employer's Insurance of Wausau ("Wausau"), and its excess carriers, in Wisconsin state court alleging that pursuant to policies issued to MOS by Wausau in 1974 (the "Wausau Policies"), Wausau was bound to defend and indemnify Commodore, as successor to MOS, for any liability arising out of the EPA's demand for reimbursement of response costs. Complaint ¶ 22. On or about April 27, 1994, Commodore entered into a confidential agreement with Wausau (the "Insurance Settlement Agreement") settling all claims under the Wausau Policies, including Wausau's obligation to indemnify Commodore for the environmental claims asserted by the EPA. Complaint ¶ 23.

Allen-Bradley contends that to date it has expended approximately $600,000 remediating the Site.4 Approximately $435,000 of that sum was spent pre-petition (of which $266,000 represents paid legal fees) and $165,000 was expended post-petition. By order we fixed January 17, 1995 as the last day for filing claims in this case. Allen-Bradley timely filed its claim. See supra n. 4. No claim has been filed by or on behalf of the EPA.

In September 1994, Commodore contracted to sell the Site to GMT Microelectronics Corp. ("GMT") for the sum of $4.3 million, subject to higher and better offers (the "GMT Agreement"). By order dated September 22, 1994, we authorized Commodore to retain Ross-Dove Corp., Inc. ("Ross-Dove") to market the Site in an effort to identify potentially higher and better offers. That order also fixed December 15, 1994, as the date for the hearing on the approval of the GMT Agreement. We conducted that hearing and by order dated December 16, 1994, we granted Commodore's request to sell the Site to GMT for $4.3 million pursuant to the terms of the GMT Agreement. Among other things, under that agreement GMT will pay up to $1 million in costs for satisfying certain environmental issues relating to the Site, including obtaining the EPA's release of its lien on the Site. Complaint ¶ 27. Commodore retains an option (but has no obligation) to satisfy costs relating to those environmental issues in excess of the $1 million. Id. The agreement further provides that GMT will not assume any liabilities, obligations or commitments of Commodore of any kind unless it does so in writing and that the assets purchased are being conveyed free and clear of any lien, claim or encumbrance. Complaint ¶ 28.

The GMT Agreement does not allocate the consideration paid by GMT among the Site's components. Allen-Bradley contends that in the Ross-Dove Report of Sale5, filed with the Court on December 15, 1994, $2.8 million of the purchase price is attributed to the personal property at the Site. From that it concludes that $1.5 million of the proceeds are attributable to the Real Estate.


In the single cause of action alleged in the complaint, Allen-Bradley seeks to impose a constructive trust on the proceeds from the sale of the Site.6 Allen-Bradley contends that by remediating the Site in accordance with the EPA's administrative order, it facilitated the sale of the Site to GMT. It alleges that its efforts rendered the Site, otherwise valueless due to the environmental problems, saleable for at least the sum of $4.3 million. Complaint ¶ 31. Because Commodore's liquidating plan essentially will be funded by the Site proceeds, and the estate's liabilities greatly exceed its assets, Allen-Bradley contends that Commodore and the estate are being unjustly enriched at its expense. Complaint ¶¶ 33, 34.7

"A constructive trust is the formula through which equity finds expression. When property has been acquired in such circumstances that the holder of legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee." Beatty v. Guggenheim Exploration Co., 225 N.Y. 380, 386, 122 N.E. 378 (1919); see also Buchanan v. Brentwood Federal Savings & Loan Assn., 457 Pa. 135, 320 A.2d 117, 127 (1974) (quoting Beatty). A constructive trust is an equitable remedy designed to prevent unjust enrichment. XL Datacomp, Inc. v. Wilson (In re Omegas Group, Inc.), 16 F.3d 1443, 1449-50 (6th Cir. 1994); Patrick & Wilkins Co. v. Reliance Ins. Co., 500 Pa. 399, 456 A.2d 1348, 1350 (1983); Stauffer v. Stauffer, 465 Pa. 558, 351 A.2d 236, 240 (1976). The parties are correct that because the Site is located in Pennsylvania, Pennsylvania law determines whether a constructive trust should be impressed on the proceeds. See Jaffke v. Dunham, 352 U.S. 280, 281, 77 S.Ct. 307, 308, 1 L.Ed.2d 314 (1957); Kemp v. Bowen (In re Visiting Nurse Ass'n of Western Pennsylvania), 143 B.R. 633, 637 (W.D.Pa.1992), aff'd, 986 F.2d 1410 (3d Cir.1993); see also Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979) (in bankruptcy cases, "property interests are created and defined by state law"); Sanyo Elec., Inc. v. Howard's Appliance Corp., (In re Howard's Appliance Corp.), 874 F.2d 88, 93 (2d Cir.1989) ("The existence and the nature of a debtor's interest, and correspondingly the estate's interest in property is determined by state law." (citations omitted)).8

The complaint focuses principally on Commodore's alleged unjust enrichment, see Complaint ¶¶ 25, 31-35, although plaintiff purports to allege that it has been defrauded by Commodore. See Complaint ¶¶ 23, 24, 35. Under Rule 12(b)(6), a complaint will be dismissed if it fails "to state a claim upon which relief can be granted." Fed.R.Civ.P. 12(b)(6). A motion to dismiss addresses the adequacy of the pleadings, not the merits of the complaint. See Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir.1985); Stern v. Gen. Elec. Co., 1992 WL 8195 (S.D.N.Y. January 14, 1992); see also 5A Charles A. Wright & Arthur R. Miller Federal Practice and Procedure § 1356 (West 2d ed.1990). The motion should be granted only if it appears with certainty that no set of facts can be established at trial which would entitle plaintiff to any relief. See Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957); see also Brass v. American Film Technologies, Inc. 987 F.2d 142, 150 (2d Cir. 1993) (quoting Conley); Henschke v. New York Hospital-Cornell Medical Ctr., 821 F.Supp. 166, 168 (S.D.N.Y.1993) (citing Conley). Generally, only the complaint and documents annexed to the complaint or those incorporated by reference therein, are relevant in considering the merits of a Rule 12(b)(6) motion....

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