In re Envirodyne Industries, Inc.

• Decision Date: 01 December 1994
• Docket Number: 93 B 318,93 B 312,93 B 316,Bankruptcy No. 93 B 310,93 B 319 and 94 A 00797.
• Citation: 174 BR 986
• Parties: In re ENVIRODYNE INDUSTRIES, INC., et al., Debtors. ENVIRODYNE INDUSTRIES, INC., Plaintiff, v. CONNECTICUT MUTUAL LIFE COMPANY, The Cooper Companies, Inc., Presidential Life Insurance Company, M D Sass Re/Enterprise Partners L.P., and Gruss Partners, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

174 B.R. 986 (1994)

In re ENVIRODYNE INDUSTRIES, INC., et al., Debtors.

ENVIRODYNE INDUSTRIES, INC., Plaintiff, v. CONNECTICUT MUTUAL LIFE COMPANY, The Cooper Companies, Inc., Presidential Life Insurance Company, M D Sass Re/Enterprise Partners L.P., and Gruss Partners, Defendants.

Bankruptcy Nos. 93 B 310, 93 B 312, 93 B 316, 93 B 318, 93 B 319 and 94 A 00797.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

December 1, 1994.

COPYRIGHT MATERIAL OMITTED

Allan S. Brilliant, Holleb & Coff, Chicago, IL, for debtors/plaintiff.

Julian Solotorovsky, Kelley Drye & Warren, Chicago, IL, for defendant Connecticut Mutual Life Co.

David S. Kurtz, Jones, Day, Reavis & Pogue, Chicago, IL, for Cooper Companies, Inc.

Steven J. Harper, Kirkland & Ellis, Chicago, IL, for Gruss Partners.

MEMORANDUM OPINION

DEFENDANTS' MOTION TO DISMISS

JOHN D. SCHWARTZ, Chief Judge.

The matter before the court is the Motion of Connecticut Mutual Life Insurance Company, The Cooper Companies, Inc., Presidential Life Insurance Company ("Presidential"), M D Sass RE/Enterprise Partners L.P., and Gruss Partners ("Gruss") (these parties shall be collectively referred to as "Defendants") to Dismiss the complaint of Envirodyne Industries, Inc. ("Envirodyne"). Envirodyne alleges that the Defendants, by filing an involuntary petition for bankruptcy under Chapter 11 of the Bankruptcy Code (11 U.S.C. §§ 101-1330), breached the Indenture by which they were bound. The Defendants maintain that the Order confirming Envirodyne's plan of reorganization prevents Envirodyne from pursuing this action on the grounds of res judicata, equitable estoppel, or judicial estoppel; that the Indenture provisions do not preclude suits for overdue interest; and that the Indenture does not provide a cause of action to Envirodyne. After considering the Defendants' Memorandum in Support of Motion To Dismiss, Reply Memorandum, Response to Envirodyne's Supplemental Memorandum, and Response to Envirodyne's Reply to Defendants' Response; and Envirodyne's Response to Motion to Dismiss, Supplemental Memorandum, and Reply to Defendants' Memorandum in Response to Envirodyne's Supplemental Memorandum, the court shall grant the Defendants' Motion to Dismiss because the Defendants' filing of an involuntary petition against Envirodyne to seek the payment of overdue interest was not a breach of the Indenture.

BACKGROUND

On January 6, 1993, the Defendants filed an involuntary bankruptcy petition against Envirodyne in the United States Bankruptcy Court for the Northern District of Illinois. Each Defendant was the holder of 13½% (originally 12%) notes ("Notes") under an indenture dated June 15, 1986¹ and due June 15, 1996 between Envirodyne and Continental Illinois National Bank and Trust Company of Chicago, as trustee ("Indenture").² Earlier on January 6, the Defendants notified the Trustee of the impending bankruptcy petition. The next day, Envirodyne and certain of its subsidiaries ("Debtors") filed voluntary chapter 11 petitions in order to put the reorganization on a "fast track"³ to mitigate the long term damage to the Debtors.

The reorganization proceeded expeditiously and on December 17, 1993, Envirodyne's plan of reorganization was confirmed.⁴ On March 30, 1994, Envirodyne filed this action in the Circuit Court of Cook County Illinois, Law Division. On or about April 29, 1994, the Defendants' petition to have the case removed to this court was granted. In response to the Defendants' allegations that res judicata or estoppel should preclude this action, Envirodyne alleges the following: that while it did not disclose the likelihood of it filing this breach of contract suit in either its Plan or related Disclosure Statement, it did include a general provision in Order No. 164, as well as the Plan and Disclosure Statement, stating that:

. . . on the Effective Date, the Reorganized Debtors will be vested with title to all of the property of their respective Estates, regardless of whether scheduled by the Debtors, including, without limitation, all causes of action of any kind whatsoever not otherwise released pursuant to the terms of the Plan, free and clear of all liens, claims, encumbrances, charges and other interests of creditors and equity security holders, in accordance with section 1141 of the Bankruptcy Code . . .

Order No. 164 at 6; See also Debtors' Disclosure Statement at 50; Plan at § 8.03. In addition, Envirodyne asserts that the Defendants were made aware of the possibility of this suit prior to the confirmation of its Plan. In its First Interim Application for Allowance and Payment of Attorneys' Fees and Reimbursement of Expenses Pursuant to Sections 330 and 331 of the Bankruptcy Code filed on May 26, 1993 ("Application"), Envirodyne reported that it had spent time researching potential causes of action against the Defendants for damages resulting from the filing of the involuntary petition. Specifically, it stated that it was investigating a breach of contract action against the Defendants for violating § 6.04 of the Indenture. See Application at 28. More importantly, in conjunction with the preparation for hearings on the adequacy of the disclosure statement, Envirodyne's counsel served discovery requests on all of the Defendants, seeking "`all documents concerning, . . . and/or explaining the involuntary filing,' the relationship between the Defendants or any communications between the Defendants." See Plaintiff's Response to Defendants' Motion to Dismiss at 3. Further, the Unofficial Committee of 13½ % Noteholders ("Unofficial Committee")⁵, in a fee application, acknowledged Envirodyne's investigation by stating that "the Debtors' discovery program apparently was designed in substantial part to fish for information regarding the propriety of the filing of the involuntary petition in January, 1993." See Plaintiff's Response to Defendants' Motion to Dismiss at 4, citing Unofficial Committee's Fee Application at 19, ¶ 31, n. 6. Finally, during the hearings on the Unofficial Committee's objections to and motion to quash Envirodyne's discovery requests, one of Envirodyne's attorneys stated that Envirodyne was seriously considering filing charges against the Defendants after its attorneys completed their investigation. See Transcript of Proceedings Before the Honorable John D. Schwartz, September 8, 1994, pp. 96-97.

Next, in connection with the Defendants' contractual arguments, Envirodyne argues that the terms of the Notes and the Indenture support its position that the Defendants' breached the specific terms of the Indenture. On the face of each Note, Envirodyne agreed to pay interest semiannually on June 15 and December 15 of each year, commencing December 15, 1986 and continuing until 1996. When the involuntary petition was filed, Envirodyne had missed several interest payments. Notwithstanding the provisions of § 6.04 of the Indenture, the Defendants filed their involuntary petition as a means to obtain payment of the past due interest owed to them. Envirodyne maintains that, by not adhering § 6.04 of the Indenture when filing their involuntary petition, the Defendants breached the Indenture and caused substantial damage to the Debtors.

Section § 6.04 of the Indenture provides that:

No holder of any Note shall have any right by virtue of or by availing itself of any provision of this Indenture to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Indenture or for the appointment of a receiver or trustee or for any other remedy hereunder, unless such holder previously shall have given to the Trustee written notice of default and of the continuance thereof, as hereinbefore provided, and unless also the holders of not less than 25% in aggregate principal amount of the Notes then outstanding shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have neglected or refused to institute any such action, suit or proceeding, and no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the holders of a majority in aggregate principal amount of the Notes; it being understood and intended, and being expressly covenanted by the taker and holder of every Note with every other taker and holder and the Trustee, that no one or more holders of Notes shall have any right in any manner whatever by virtue of or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of any other holder of such Notes, or to obtain or seek to obtain priority over or preference to any other such holder or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all holders of Notes and subject in all cases to Article Fifteen.⁶

Notwithstanding any other provisions in this Indenture, however, the right of any holder of any Note, subject to Article Fifteen, to receive payment of the principal of (and premium, if any) and interest on such Note, on or after the respective due dates expressed in such Note, or to institute suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such holder.

Indenture at § 6.04 (This clause shall hereinafter be referred to in its entirety as the "No Action Clause" or "Section 6.04" and the second paragraph of the clause as the "Principal and Interest Exception").

STANDARDS FOR A MOTION TO DISMISS

The Defendants' Motion to Dismiss is brought pursuant to Fed.R.Civ.P. 12(b)(6) which is made applicable to this adversary proceeding through ...