In re Consolidated Auto Recyclers, Inc., 90-10445
| Citation | 123 BR 130 |
| Decision Date | 11 January 1991 |
| Docket Number | 90-10499.,No. 90-10445,90-10445 |
| Parties | In re CONSOLIDATED AUTO RECYCLERS, INC., and Consolidated Auto Recyclers of Massachusetts, Inc., Debtors. |
| Court | United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Maine |
Daniel Amory, Benjamin E. Marcus, Drummond, Woodsum, Plimpton & MacMahon, Portland, Me., for Walter Swenson.
Anthony E. Perkins, Gregory A. Tselikis, Bernstein, Shur, Sawyer & Nelson, Portland, Me., for Allied Capital Corporation.
Before the court is the motion of Allied Capital Corporation1 ("Allied") to dismiss Consolidated Auto Recyclers of Massachusetts Chapter 11 case. Allied contends that Consolidated Auto Recyclers of Massachusetts, Inc. (CARM), was unlawfully made the subject of bankruptcy proceedings through the unauthorized actions of the bankruptcy trustee of Consolidated Auto Recyclers, Inc. (CAR), CARM's parent and sole shareholder.
Allied urges that dismissal is required because the parent corporation's trustee was not empowered, as a matter of corporate authority, to initiate proceedings for its subsidiary. In addition, Allied urges that CAR's trustee's action in filing a voluntary petition for the subsidiary was an extraordinary action, beyond the permission to operate the debtor's business granted by 11 U.S.C. §§ 363(c)(1) and 1108, and, therefore, that prior notice, hearing and authorization pursuant to 11 U.S.C. § 363(b) was required to imbue the filing with lawful authority.
The trustee, in turn, argues that, as a matter of corporate law, the bankruptcy filing was authorized and, in any event, through its participation in the affairs of the parent and the subsidiary, Allied is estopped from complaining or has waived objection to the bankruptcy filing. On the bankruptcy law front, the trustee contends that prior authority was not required for filing the subsidiary's petition and, alternatively, that if such authorization were indispensable, it can be granted nunc pro tunc. The trustee has filed a motion seeking nunc pro tunc authority to initiate the subsidiary's bankruptcy, should the court find that authority was wanting on the date that the petition was filed. Allied has objected.
Before resolving the issues raised by the motions, a brief discussion of the procedural history of the cases is in order.
The docket reveals that CAR filed a voluntary petition invoking relief under Chapter 11 on July 27, 1990. The petition was accompanied by a shareholder's resolution authorizing CAR's chief executive officer to initiate bankruptcy proceedings.2 The filing was initially met with a motion to dismiss filed by Rodney P. Rodrigue, Wayne E. Bowers, and John M. Robichaud (the "Principals"), shareholders of CAR who were active in the business from its early days. The United States Trustee moved for appointment of a trustee on an expedited basis and, ultimately, the Principals withdrew their motion to dismiss and consented to the trustee's appointment. On August 9, 1990, Walter C. Swenson, Jr., was appointed as CAR's trustee.
On August 22, 1990, Trustee Swenson filed a voluntary Chapter 11 petition for CARM and sought appointment of a trustee and joint administration with the estate of CAR. Allied objected to appointment of the trustee and moved for dismissal of the CARM case. On September 5, 1990, Swenson was appointed trustee for CARM without prejudice to Allied's right to seek dismissal. An order for joint administration was entered at that time.
Allied pursued its motion to dismiss. Evidentiary hearings were conducted on October 4 and December 17, 1990. In the course of the December 17 hearings, counsel for the trustee moved orally for an order granting the trustee authority, nunc pro tunc, to file the CARM bankruptcy petition. At the court's direction, a written motion was filed on December 19, 1990.3
In support of the motion to dismiss, Allied presented the testimony of Frederick L. Russell, Jr., its senior vice-president, and the testimony of Ralph Dyer, who served as chairman of the board and chief executive officer of CAR from July 2, 1990, until he was relieved of duties by the trustee on August 14, 1990. The trustee testified in opposition to the motion.
Based upon the testimony adduced at the evidentiary hearings, and the exhibits in evidence,4 the court today enters the following findings of fact and conclusions of law.
CAR is a corporation organized and existing under the laws of the State of Delaware. CARM was incorporated in March 1990, also under Delaware law.5
On October 30, 1989, CAR signed an agreement (the "Investment Agreement") calling for a $3,000,000.00 loan from Allied, secured by mortgages, a security interest in personal property, assignments of contract rights, collateral assignments of leases, assignments of life insurance policies on the Principals and a stock pledge.6 The Investment Agreement was amended on December 8, 1989, to add another Allied entity to the group providing credit to CAR.7 Subsequently, the parties negotiated a second amendment which provided for a "bridge loan" of $900,000.00 and called for a revision of the stock pledge established under the Investment Agreement.8
CARM issued 100 shares of its stock to CAR on March 29, 1990. CARM's stock transfer ledger shows no other shares issued at any time prior to August 22, 1990, and reveals that the originally-issued 100 shares remain registered in the name of CAR.9
By-laws for CARM were adopted on March 28, 1990.10 Those by-laws provided for a board of directors of not less than three nor more than fifteen members; the number of directors was to be fixed from time to time by board resolution.11 Any director or the entire board could be removed, with or without cause, by the holders of a majority of the shares entitled to vote upon an election of directors.12
A third amendment to the Investment Agreement was effected on March 30, 1990. It added provisions relating to CARM. Under the third amendment, CARM borrowed $500,000.00 from Allied, evidenced by two $250,000.00 senior secured notes. The obligation carried interest at 15% and was payable in monthly, interest-only installments, with the entire principal due on December 31, 1990.13 The $500,000.00 obligation was secured by a security interest in all of CARM's assets and by a pledge of CARM's stock.14 It was guaranteed by CAR. To further secure its obligations to Allied, CARM executed a separate assignment of accounts and contract rights, dated April 1, 1990.15 The third amendment also provided that CAR was to have a board of no more than five directors, and that Allied would place two directors on the board.16
Although $10,000.00 in closing costs allocable to the extension of credit to CARM was paid at closing, CARM made no payments of principal or interest to Allied at any time before the petition was filed on its behalf.17 Under the terms of the notes, failure to pay monthly interest obligations constituted a default and could trigger acceleration and other remedies.18
On June 19, 1990, Allied gave notice of CARM's default and stated that it intended to sell the pledged CARM stock at public auction:
As you know, Consolidated Auto Recyclers of Massachusetts, Inc. ("CARM") has come into default under its loans from the Allied companies. Under the CARM Stock Pledge Agreement between Consolidated Auto Recyclers, Inc. ("CAR") and Allied Investment Corporation and Allied Investment Corporation II ("Allied") dated March 30, 1990, CAR has pledged 100% of the capital stock of CARM as collateral for the $500,000.00 Senior Secured Notes dated March 30, 1990. This letter is to advise you that Allied is bringing the subject common stock shares to foreclosure at public auction.19
The June 19 letter accelerated the senior secured note obligations and provided that, unless those obligations were paid in full, the shares would be sold at auction on Monday, July 2, 1990. Paragraph E of the letter explained:
Effect of sale: The sale will divest CAR of all its rights, interest and ownership in each of the shares sold; should the sale proceeds be insufficient to pay the Senior Notes in full (including principal, interest and all costs and expenses of sale), CARM and its guarantors will be liable for the deficiency. . . .20 (Emphasis supplied.)
As noted, the foreclosure sale of the CARM shares was a consequence of the CARM Stock Pledge Agreement. That agreement, which bears the signatures of corporate officers of CARM and CAR indicates that the pledged shares were to serve as security for CARM's indebtedness to Allied and describes the remedies available upon default, including the right to sell the shares at auction on ten days notice to CAR. Paragraph 6 of the pledge provides:
During the term of this CARM Stock Pledge Agreement, if no default has occurred under the Debt, the stock holders shall retain the right to vote the subject shares on all corporate questions, and the secured party or any purchaser at any foreclosure sale shall, if necessary, execute due and timely proxies in favor of the undersigned upon request.21
Allied's declaration of default and notification of its intent to foreclose on the CARM shares sparked a new round of discussions among the parties, culminating in what was termed the "midnight agreement,"22 executed in the wee hours of June 28, 1990, after many hours of negotiation.23 Among other things, the agreement called for an expansion to seven members of the CAR and CARM boards of directors24 and for retention of Mr. Ralph Dyer as CAR's chief executive officer, with weekly reporting duties to the CAR board.
Through December 31, 1991, three members of the CAR board were to be nominees of Allied and the Principals were to hold three seats. CEO Dyer would be the seventh board member, serving as a "tie breaker". The parties agreed that CAR's by-laws would be amended to provide that board action...
To continue reading
Request your trial