In re England Motor Co.

• Decision Date: 19 January 2010
• Docket Number: No. 08-15221-NPO.,08-15221-NPO.
• Citation: 426 B.R. 178
• Parties: In re ENGLAND MOTOR COMPANY, Happy Day Motors, Inc. and England Holdings, Inc., Debtors.
• Court: U.S. Bankruptcy Court — Northern District of Mississippi

426 B.R. 178

In re ENGLAND MOTOR COMPANY, Happy Day Motors, Inc. and England Holdings, Inc., Debtors.

No. 08-15221-NPO.

United States Bankruptcy Court, N.D. Mississippi.

January 19, 2010.

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Jeffrey A. Levingston, Levingston & Levingston, PA, Cleveland, MS, for Debtor.

MEMORANDUM OPINION ON MOTION TO TERMINATE THE AUTOMATIC STAY, AND FOR ABANDONMENT

NEIL P. OLACK, Bankruptcy Judge.

This matter came before the Court for hearing on September 9, 2009 (the "Hearing"), on the Motion to Terminate the Automatic Stay, and for Abandonment ("Motion") (Dkt. No. 171) filed by Guaranty Bank and Trust Company ("Guaranty Bank"), and the Answer to Guaranty Bank and Trust Company's Motion to Terminate the Automatic Stay and for Abandonment ("Answer") (Dkt. No. 173) filed by the chapter 7 case trustee, Stephen P. Livingston (the "Trustee"). At the Hearing, Jim F. Spencer, Jr. represented Guaranty Bank, and the Trustee represented himself. After the Hearing, the Court directed Guaranty Bank and the Trustee to submit letter briefs addressing two issues: (1) whether Guaranty Bank's claim and debt are mutual obligations within the meaning of 11 U.S.C. § 553(a)(3); and (2) whether the Trustee's strong-arm powers under 11 U.S.C. § 544 take priority over Guaranty Bank's setoff rights. The Court has received the letter briefs from the parties and, after having considered the arguments of counsel and the pleadings, finds that the Motion should be granted in part and denied in part for the reasons that follow.¹

Jurisdiction

This Court has jurisdiction of the parties to and the subject matter of this proceeding pursuant to 28 U.S.C. § 1334. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(G). Notice of the Hearing on the Motion was proper under the circumstances.

Facts

On December 3, 2008, (the "Petition Date") England Motor Company ("England Motor") and Happy Day Motors, Inc. ("Happy Day") filed voluntary petitions for relief under chapter 7 of the United States Bankruptcy Code² in Case Nos. 08-15221-NPO and 08-15222-NPO, respectively. On that same day, Perry N. England ("England") filed his personal, voluntary petition for relief under chapter 7 in Case No. 08-15224-NPO.

2. Almost two months later, on January 23, 2009, England Holdings, Inc.³ ("England Holdings") filed its voluntary petition for relief under chapter 7 of the Bankruptcy Code in Case No. 09-10289-NPO.

3. England is the president of all three companies: England Motor, Happy Day, and England Holdings (collectively the "England Entities") and is the sole owner of England Holdings. (Cred. Mtg. Tr. 6, Jan. 9, 2009; Consol. Hr'g Tr. 2, July 17, 2009). England Holdings is the parent company of England Motor and Happy Day. (Consol. Hr'g Tr. 12).

4. England Motor and Happy Day operated, respectively, as a Ford and Honda automobile dealership in Greenville, Mississippi. (Consol. Hr'g Tr. 2-3). Happy Day came into existence in order to facilitate England's acquisition of a Honda franchise because American Honda Motor Co., Inc. required, as a condition for the sale of its franchise, the existence of a corporation separate from England Motor, the owner of the Ford franchise. (Consol. Hr'g Tr. 21). England Holdings was formed as an "umbrella" corporation for reasons that England described as "accounting purposes." (Consol. Hr'g Tr. 21).

5. England Holdings, England Motor, and Happy Day functioned as one going-concern under the name "England Motor Company." (Consol. Hr'g Tr. 21). According to England, the public at large would have no reason to associate either "England Holdings" or "Happy Day" with the automobile dealership. (Consol. Hr'g Tr. 26). The three England Entities, however, were formed as separate corporations prior to the filing of their respective bankruptcy petitions. (Auto. Stay Hr'g Tr. 5-6, Sept. 9, 2009).

6. England Holdings was the sole borrower on a line of credit from Guaranty Bank in the approximate amount of $1 million, as evidenced by two promissory notes ("Loans"):

a. Loan No. 645737444, dated February 5, 2007, in the original principal amount of $757,417.30 (Ex. A, Dkt. No. 6); and

b. Loan No. 4601350959, dated June 13, 2008, in the original principal amount of $300,275.00 (Ex. C, Dkt. No. 6).

7. As security for the Loans to England Holdings, England, in his capacity as president of England Motor, executed two deeds of trust in favor of Guaranty Bank on certain real property owned by England Motor in Greenville, Mississippi. (Exs. B & D, Dkt. No. 6).

8. England used the proceeds of the Loans to finance and operate both England Motor and Happy Day, and, in that regard, would instruct Guaranty Bank to deposit draws from the Loans directly into the bank account of either England Motor or Happy Day, depending upon which dealership needed the funds. (Cred.Mtg. Tr. 8-10). Guaranty Bank did not require England Holdings to maintain an account at Guaranty Bank as part of its lending arrangement, and England did not open such an account for England Holdings on his own initiative.⁴ (Cred. Mtg. Tr. 10-11; Aff. of Naaman, Dkt. No. 14-1, Ex. B; Case No. 08-15222-NPO). England Holdings never directly received or used any of the proceeds from the Loans. (Cred. Mtg Tr. 11-12). Only England Motor made payments on the Loans to Guaranty Bank. (Cred. Mtg. Tr. 12; Aff. of Naaman, Dkt. No. 14-1; Case No. 08-15222-NPO).

9. England closed both automobile dealerships, England Motor and Happy Day, on December 3, 2008, the Petition Date. (Consol. Hr'g Tr. 6).

10. As of the commencement of its bankruptcy case, England Holdings owed Guaranty Bank the principal amount of $959,505.12. (Claim 22-1).

11. This Court lifted the automatic stay in the bankruptcy cases of both England Motor and England Holdings to allow Guaranty Bank to foreclose on the real property pledged by England Motor to secure the debt of its parent company, England Holdings. (Dkt. No. 33; Dkt. No. 7, Case No. 08-15224-NPO). After applying the proceeds from the foreclosure sales, the outstanding balance of the Loans owed by England Holdings to Guaranty Bank was reduced to a deficiency of $638,961.22, not including interest and attorneys' fees. (Dkt. No. 171).

12. At some point after the England Entities had commenced their bankruptcy cases, Guaranty Bank discovered that as of the Petition Date, England Motor and Happy Day had a combined balance of $248,199.67 on deposit at Guaranty Bank. (Auto. Stay Hr'g Tr. 8; Aff. of Naaman, Dkt. No. 14-1; Case No. 08-15222-NPO; Dkt. No. 171). The record does not specify the balance in each separate account.

13. In an attempt to reach the bank deposits of England Motor and Happy Day, Guaranty Bank sought to substantively consolidate the three bankruptcy cases of England Holdings, England Motor, and Happy Day, for the purpose of pooling the assets of England Motor and Happy Day and distributing those assets to the creditors of the now defunct England Entities. (Dkt. No. 14, Case No. 08-15222).

14. On February 19, 2009, Guaranty Bank filed identical substantive consolidation motions in the bankruptcy cases of England Motor (Dkt. No. 37) and England Holdings (Dkt. No. 11, Case No. 09-10289-NPO) on the ground that England treated them as a single consolidated enterprise. Guaranty Bank was unable to seek such relief in the bankruptcy case of Happy Day because it had been closed shortly after the Trustee, who was apparently unaware of the deposits at Guaranty Bank, had filed a report of "no distribution." (Dkt. No. 12, Case No. 08-15222-NPO).

15. At Guaranty Bank's request, this Court reopened the bankruptcy case of Happy Day on March 10, 2009 (Dkt. No. 16, Case No. 08-15222-NPO), which paved the way for Guaranty Bank to file a Motion for Substantive Consolidation in Happy Day. Guaranty Bank promptly did so on March 12, 2009. (Dkt. No. 17, Case No. 08-15222-NPO).

16. After an evidentiary hearing on July 17, 2009 (the "Consolidation Hearing") and in the absence of any objection, this Court substantively consolidated the bankruptcy cases of England Motor, Happy Day, and England Holdings into Consolidated Case No. 08-15221-NPO (the "Consolidation Order"). (Dkt. No. 144). The Consolidation Order provided that it should not be "considered a finding on the merits of whether Guaranty Bank is entitled to relief from the stay to seek set off of any bank accounts of either England Motor Company or Happy Day Motors, Inc." (Dkt. No. 144).

17. Guaranty Bank filed the Motion under consideration to obtain relief from the automatic stay imposed by 11 U.S.C. § 362(b)(7) so that it may exercise its right to setoff the funds in the deposit accounts of Happy Day and England Motor against the outstanding balance owed by England Holdings on the Loans. (Dkt. No. 171).

18. None of the England Entities, nor any of their other creditors, filed a pleading in opposition to, or in support of the Motion.

19. The Trustee, however, opposed the Motion on the ground, as set forth in his Answer and in his letter brief, that the evidence presented by Guaranty Bank was insufficient either to establish mutuality or to overcome the "strong arm" provision of 11 U.S.C. § 544. (Dkt. No. 173; Auto. Stay Hr'g Tr. 8).

Discussion

A. Setoff under the Bankruptcy Code: § 553

If Guaranty Bank can establish an unconsummated setoff right to the deposit accounts of England Motor and Happy Day, it will enjoy an advantage over other general unsecured creditors of England Holdings.⁵ John C. McCoid, II. Setoff: Why Bankruptcy Priority? 75 Va. L.Rev. 15 (1989) (discussing history of § 553 as exception to the fundamental policy in bankruptcy law of equality of distribution among unsecured creditors). This is so because the effect of setoff is to elevate an otherwise unsecured claim to secured status. See 11 U.S.C. § 506(a) ("allowed claim of a creditor ... that is subject to setoff under § 553 of this title, is secured...