In re Crowley, Milner and Co., Bankruptcy No. 99-41767.

• Decision Date: 01 October 2003
• Docket Number: Bankruptcy No. 99-41770.,Bankruptcy No. 99-41767.,Adversary No. 00-4655.
• Parties: In re CROWLEY, MILNER AND COMPANY, Debtor. In re Steinbach Stores, Inc., Debtor. The Official Committee of Unsecured Creditors of Crowley, Milner and Company and the Official Committee of Unsecured Creditors of Steinbach Stores, Inc., Plaintiffs, v. Dennis Callahan and John Dallacqua, as officers and/or directors of Crowley, Milner and Company and Steinbach Stores, Inc., Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

299 B.R. 830

In re CROWLEY, MILNER AND COMPANY, Debtor.

In re Steinbach Stores, Inc., Debtor.

The Official Committee of Unsecured Creditors of Crowley, Milner and Company and the Official Committee of Unsecured Creditors of Steinbach Stores, Inc., Plaintiffs, v. Dennis Callahan and John Dallacqua, as officers and/or directors of Crowley, Milner and Company and Steinbach Stores, Inc., Defendants.

Bankruptcy No. 99-41767.

Bankruptcy No. 99-41770.

Adversary No. 00-4655.

United States Bankruptcy Court, E.D. Michigan, Southern Division.

October 1, 2003.

COPYRIGHT MATERIAL OMITTED

Marc M. Bakst, Detroit, MI, Sonia U. Chae, Robert J. Diehl, Jr., Detroit, MI, Gary W. Faria, Bloomfield Hills, MI, David K. Faust, Office of the Atty. General/Collections, Detroit, MI, Dennis M. Haley, Grand Blanc, MI, Vicki R. Harding, Detroit, MI, Neil E. Herman, Steven J. Reisman, New York City, John D. Hertzberg, Esq., Bingham Farms, MI, Robert S Hertzberg, Donald J. Hutchinson, Peter A. Jackson, Daniel G. Kielczewski, Kay Standridge Kress, Mark T. Nelson, Kevin C. Richard, Jay L. Welford, Richard A. Sundquist, Detroit, MI, Terrance A. Keith, Thomas E. Marshall, Troy, MI, Richardo I. Kilpatrick, Auburn Hills, MI, Paul Magy, Southfield, MI, Jeffrey Meyers, Philadelphia, PA, Kevin M. Newman, Syracuse, NY, Michael I. Zousmer, Bloomfield Hills, MI, Michael H. Traison, Miller, Canfield, Paddock & Stone, Barry A. Steinway, Birmingham, MI, Steve Sowell, Mt. Clemons, MI, for creditors.

Earle I. Erman, Southfield, MI, Judy A. O'Neill, Detroit, MI, Adam C. Rogoff, Cadwalader, Wickersham & Taft, New York City, for debtor.

Tauras N. Ziedas, Detroit, MI, U.S. Trustee.

Ronald R. Sussman, New York City, Deborah L. Fish, Detroit, MI, for Official Committee of Unsecured Creditors of Crowley, Milner and Company.

OPINION GRANTING DEFENDANT DENNIS CALLAHAN'S MOTION TO DISMISS

PHILLIP J. SHEFFERLY, Bankruptcy Judge.

I. Introduction

This matter comes before the Court upon a motion to dismiss filed by Defendant, Dennis Callahan ("Callahan"). The motion to dismiss is made pursuant to Fed.R.Civ.P. 12(b)(6) and 56 as made applicable to this adversary proceeding by Fed. R. Bankr.P. 7012(b)(6) and 7056. The motion was heard by the Court on September 11, 2003. For the reasons set forth in this opinion, the motion to dismiss made pursuant to Fed.R.Civ.P. 12(b)(6) is denied and the motion to dismiss made pursuant to Fed.R.Civ.P. 56 is granted.

II. Facts

On February 4, 1999, the Debtors filed separate voluntary petitions for relief under Chapter 11. Prior to filing the Debtors had operated retail specialty department stores in Michigan under the "Crowleys" trade name and in various northeastern states under the "Steinbach" trade name. The Chapter 11 case file indicates that the Debtors had experienced substantial operating losses that led to the filing of the Chapter 11 cases. The cases were jointly administered. Official unsecured creditors' committees (collectively, "Committees") were formed in each of the cases. On August 18, 1999, the Debtors and the Committees together filed an Amended Joint Plan of Liquidation ("Amended Plan"). On the same day, the Debtors and the Committees together filed an Amended Disclosure Statement relating to Amended Plan ("Amended Disclosure Statement"). On August 18, 1999, the Bankruptcy Court entered its Order (a) Approving the Amended Disclosure Statement, (b) Establishing Procedures for Solicitation and Tabulation of Votes, and (c) Scheduling Hearing on Confirmation of the Amended Joint Plan of Liquidation ("Order Approving Amended Disclosure Statement"). Pursuant to the Order Approving Amended Disclosure Statement, a hearing on confirmation of the Amended Plan was scheduled for October 13, 1999.

The confirmation hearing took place as scheduled on October 13, 1999, and an Order Confirming Amended Joint Plan of Liquidation Under Chapter 11 of the Bankruptcy Code ("Order Confirming Plan") was entered by the Court that day. In paragraph 12.4 on page 28, the Amended Plan authorized the Committees to pursue any of the Debtors'"claims or causes of action against any person." Paragraph 74 on page 22 of the Order Confirming Plan also authorized the Committees, as one of the "Plan Proponents," to pursue any of the Debtors'"claims or causes of action against any person."

On September 20, 2000, the Committees started this adversary proceeding by filing a two count complaint ("Complaint") against Dennis Callahan and John Dallacqua as defendants. The Complaint sought damages in excess of $25,000,000. Callahan had served as the president, chief executive officer, and chairman of the boards of directors of the Debtors until late 1998. Dallacqua had served as the chief financial officer, vice president of finance, secretary, and treasurer of the Debtors until sometime in 1998. The Complaint alleged that Callahan and Dallacqua had breached their fiduciary duties to the Debtors and their creditors.

Callahan and Dallacqua each filed a pre-answer motion to dismiss the Complaint. Callahan's motion to dismiss ("First Motion to Dismiss") was brought pursuant to Fed.R.Civ.P. 12(b)(6). Callahan asserted that the Complaint failed to state a claim upon which relief can be granted. In his memorandum of law in support of the First Motion to Dismiss, Callahan argued that under applicable Michigan law, there is no fiduciary duty owed by a corporation's officers and directors to the general creditor body of the corporation. A hearing on the First Motion to Dismiss was held on March 29, 2001 before Judge Walter Shapero. On April 2, 2001, Judge Shapero entered an Order Denying Defendants Callahan's and Dallacqua's Motions to Dismiss ("Order Denying First Motion to Dismiss"), finding that "both the Debtors' plan and order confirming the plan expressly authorized the Plaintiff to pursue Debtors' causes of action against Debtors' officers and directors."

After entry of the Order Denying First Motion to Dismiss, Callahan filed his answer and affirmative defenses to the Complaint on May 7, 2001. Dallacqua also filed responsive pleadings to the Complaint. The Court file reflects that there were a number of pleadings then filed by each of the parties to the adversary proceeding and that there were hearings conducted before Judge Shapero and before District Court Judge Paul V. Gadola with respect to a motion to withdraw the reference that was filed by Callahan. As the adversary proceeding continued, one of the pleadings filed was the Committees' Motion to Strike Affirmative Defenses of Defendant Callahan and Defendant Dallacqua ("Motion to Strike"). The Motion to Strike was filed on July 6, 2001 and heard on January 30, 2002 by Judge Shapero. On April 3, 2002, Judge Shapero entered a Memorandum Opinion and Order Granting in Part and Denying in Part the Official Committees of Unsecured Creditors' Motion to Strike Affirmative Defenses of Defendant Callahan and Defendant Dallacqua ("Order Striking Affirmative Defenses"). After the parties exchanged initial disclosures as required by Fed.R.Civ.P. 26(a)(1), the Court conducted an initial scheduling conference on September 13, 2002 and entered on September 17, 2002 its Initial Adversary Proceeding Scheduling Order. The Initial Adversary Proceeding Scheduling Order, among other things, set time tables for conducting discovery, filing dispositive motions, and the scheduling of further proceedings before the Court.

The next hearing conducted by the Court in the adversary proceeding took place on November 15, 2002. That hearing was scheduled to hear Callahan's objections to the Committees' initial disclosures. As the parties discussed their dispute on the record regarding the initial disclosures, they also advised the Court that the Committees would be filing an amended complaint. On December 30, 2002, the Committees did file an amended complaint ("Amended Complaint"). On January 31, 2003, Callahan filed his answer, affirmative defenses, and demand for jury trial with respect to the Amended Complaint. Callahan's affirmative defenses to the Amended Complaint included certain affirmative defenses not raised in his answer and affirmative defenses to the Complaint. Among the new affirmative defenses was the defense of res judicata, the addition of which is a central issue in the matter now before the Court.

On March 27, 2003, upon stipulation of the parties, Judge Shapero entered an Amended Adversary Proceeding Scheduling Order that extended the dates for discovery, dispositive motions, and other proceedings in this action. Shortly thereafter, the adversary proceeding was reassigned to Judge Phillip J. Shefferly. On March 24, 2003, Callahan filed a motion to amend his affirmative defenses. That motion was heard by Judge Shefferly on May 9, 2003. On June 9, 2003, the Court entered its order granting Callahan leave to amend his affirmative defenses. Callahan then filed amended affirmative defenses on June 11, 2003. His amended affirmative defenses included eight new affirmative defenses that had not been included in the answer and affirmative defenses to the Amended Complaint that Callahan filed on January 30, 2003.

A review of the Court file also reflects that substantial discovery was being undertaken during the several months after the Committees filed the Amended Complaint and Callahan filed his answer and affirmative defenses to the Amended Complaint. That fact is also evidenced by a recitation in a proposed order that was submitted by the parties to the Court for the purpose of extending the existing schedule for discovery, dispositive motions, and other hearings. Upon the stipulation of the parties, on June 19, 2003, the Court signed a Second Amended Adversary Proceeding Scheduling Order ("Second Amended Scheduling Order"). The Second Amended Scheduling Order, among other things, extended discovery through November 30, 2003, and extended the date for the filing of dispositive motions through December 31, 2003...