In re Flagstaff Foodservice Corp.

• Decision Date: 12 April 1983
• Docket Number: Bankruptcy No. 81 B 11430-11436 (PBA).
• Citation: 29 BR 215
• Parties: In re FLAGSTAFF FOODSERVICE CORPORATION, et al., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

29 B.R. 215 (1983)

In re FLAGSTAFF FOODSERVICE CORPORATION, et al., Debtors.

Bankruptcy No. 81 B 11430-11436 (PBA).

United States Bankruptcy Court, S.D. New York.

April 12, 1983.

Paul, Weiss, Rifkind, Wharton & Garrison, New York City, for Nelson Peltz, Peter May and Robert Ronnenberg; Helen Davis Chaitman, New York City, of counsel.

Jarblum & Solomon, P.C., New York City, for Robert Peltz; William Jarblum, New York City, of counsel.

Raff, Scheider & Wiener, Newark, N.J., for General Elec. Credit Corp.; Jeremy Galton, Newark, N.J., of counsel.

Levin & Weintraub, New York City, for debtors; Elias Mann, New York City, of counsel.

ORDER AND DECISION ON MOTION BY CORPORATE OFFICERS TO COMPEL PAYMENT OF PAYROLL TAXES

PRUDENCE B. ABRAM, Bankruptcy Judge:

In late November 1982, a motion was made by three officers of the debtors seeking an order from this court compelling General Electric Credit Corporation ("GECC") to pay approximately $290,000 in payroll taxes incurred by Flagstaff Foodservice Corporation and its related debtors (collectively "Flagstaff") as debtors-in-possession during the course of these Chapter 11 cases, or alternatively seeking to amend the court's orders of July 21 and 29, 1981, which approved borrowing agreements between Flagstaff and GECC and granted GECC a lien on virtually all of the assets of Flagstaff, to allow Flagstaff to use its funds, which are subject to a security interest in favor of GECC, to pay these taxes. In addition, the movants seek attorneys' fees in connection with the motion. Flagstaff, as well as a fourth officer, have joined in the motion. GECC has vigorously opposed the motion.

Pursuant to Emergency Bankruptcy Rule I(d) adopted by the United States District Court for the Southern District of New York, bankruptcy judges have been authorized to perform all acts and duties necessary to handle cases and proceedings, with certain exceptions not here relevant. However, in related proceedings as defined in the rule, final judgment or issuance of a dispositive order can only be made by the District Court in the absence of consent by the parties. This court has determined that this is not a related proceeding as it involves the allowance of a claim against the estate; orders in respect to obtaining credit; and an order to turn over property of the estate. Therefore, this court can issue a final order on this motion.

In a contested matter, which this motion is, Rule 914 of the Rules of Bankruptcy Procedure, provides that "reasonable notice and opportunity for hearing shall be afforded the party against whom relief is sought." At the hearing on the motion held December 8, 1982, the court discussed whether an evidentiary hearing should be had. It became apparent to the court that affording all parties an additional opportunity to submit affidavits and legal memorandum would be sufficient and that an evidentiary hearing was not required.

As part of their moving papers, the three officers, who are Robert Ronnenberg, Peter May and Nelson Peltz, submitted two affidavits: the affidavit of Mr. Ronnenberg sworn to November 19, 1982 (the "First Ronnenberg Affidavit") and the affidavit of Peter May sworn to November 19, 1982 (the "First May Affidavit"). Mr. Ronnenberg is the vice president and controller of the debtors; Mr. May has been the vice chairman and chief financial officer of the debtors since July 22, 1981, the day after the Chapter 11 petitions were filed. The fourth officer who joined in the motion, Robert Peltz, also submitted an affidavit prior to the December 8 hearing, which was sworn to December 3, 1982. Mr. Peltz was the President and Chief Operating Officer of Flagstaff from the date of the filing of the Chapter 11 petitions until March 19, 1982. A memorandum of law was also submitted on behalf of Mr. Peltz.

Prior to the December 8th hearing, GECC filed a response to the motion which stated in part, "GECC will rely upon the annexed Affidavit." The affidavit referred to is an affidavit of Hugo De Andrea, District Manager and Operations Manager of GECC, sworn to December 1, 1982. GECC also submitted a memorandum of law.

Following the hearing on December 8th and in accordance with the timetable fixed at the hearing, additional affidavits were filed. Robert Wolf, the Regional Manager of GECC, and Richard Allen, the Senior Accounting Executive of GECC, filed identical affidavits sworn to on December 16, 1982 (the "Wolf and Allen Affidavits"). Mr. Ronnenberg filed a further affidavit sworn to December 16, 1982 (the "Second Ronnenberg Affidavit"). On December 22, 1982, there was filed an undated affidavit of William G. McLendon, the Region Collateral Validation Manager of GECC (the "McLendon Affidavit"). Finally there was filed a further affidavit from Peter May sworn to December 28, 1982 (the "Second May Affidavit").

The affidavits make a number of factual assertions, some of which are disputed by one side or the other. This court has carefully reviewed all of the affidavits and finds no dispute over the facts this court believes to be determinative of the motion. The key factual points are the following: the payroll taxes at issue arose after the commencement of these Chapter 11 cases on July 21, 1981 and are valid expenses of administration. First Ronnenberg Affidavit at 5. The indebtedness of Flagstaff to GECC at the commencement of these cases was approximately $22 million and was secured by liens on all or virtually all of the debtor's real and personal property. Within days of the filing of the petitions, Flagstaff sought approval of a new financing arrangement with GECC, pursuant to which GECC agreed to make certain advances. The order approving the financing arrangement granted GECC a lien on all of Flagstaff's assets and a superpriority status, subordinate to the rights of reclaiming creditors.¹ At the time the financing orders were signed it was apparently believed that GECC was overcollateralized as the collateral had a book value of $42 million. The GECC debt, including post-petition advances and the prepetition debt, has been reduced to less than $4.8 million. GECC has claimed, and assuming that the interest sought and expenses sought are proper that in all likelihood a deficiency will exist after liquidation of its collateral. First Allen Affidavit at ¶ 21.

At the time Flagstaff filed its Chapter 11 cases in July 1981 it was an operating entity. Within months, Flagstaff discontinued its operations and began liquidating in the Chapter 11 and GECC continued its financing. Peltz Affidavit at 2-3. Flagstaff has never had any operating funds during the Chapter 11 cases except for the funds provided by GECC nor has it had any free assets. The First Ronnenberg Affidavit and the Second May Affidavit assert that GECC has been the primary, if not sole, beneficiary of the Chapter 11 cases to date. GECC denies that these Chapter 11's have been conducted for their benefit and have denied any benefit. See, e.g., Wolf and Allen Affidavits at 9. Until early November 1982 when GECC moved to convert the case to a Chapter 7, GECC had taken no action to foreclose its lien or to give notice of default under the loan agreement, even though Flagstaff had long ceased operating. Prior to the hearing, the November motion was withdrawn and counsel for GECC by letter dated November 22, 1982 advised the court that the motion was being withdrawn since "GECC could not in all good common sense, go forward" with the motion to convert "faced with the potential loss of one asset and the possible loss of an advantageous transaction" if conversion occurred. GECC has indeed been the primary financial beneficiary of the Chapter 11 liquidation effort since it holds a security interest on all assets in the estates and those assets have not yet yielded enough to pay off the indebtedness due it. GECC has made its election by its actions over the course of these cases to continue these cases in Chapter 11 and all that entails.

GECC's affidavits create the superficial appearance of a dispute over the degree of involvement of GECC in Flagstaff's daily operations. See, e.g., McLendon Affidavit and compare the Second Ronnenberg Affidavit at ¶ 4 and Second May Affidavit at ¶ 15. What is fundamental to this motion and what comes through clearly from the GECC affidavits is that GECC advanced monies to Flagstaff only on the basis of budget projections and that it consistently monitored (and continues to monitor) Flagstaff's liquidation operation. McLendon Affidavit at ¶ 2; Wolf and Allen Affidavits at ¶ 14 and Exhibit F; Second May Affidavit at ¶¶ 9 and 13. Given the amount of money involved, GECC could be expected to closely monitor the situation and actively consider alternative plans for realization on its collateral.

GECC has not denied the allegation in the First Ronnenberg Affidavit that GECC would have funded the payroll taxes at the time they were incurred (principally the Fourth Quarter 1981 and the First Quarter 1982) if they had been included in the budget projections. The statement in the DeAndrea Affidavit that Flagstaff could utilize advanced funds in any manner they wished is only technically correct. GECC apparently did not guide the hand that wrote the checks but equally had the funds been used for other than expected purposes, GECC would have quickly ceased further advances or otherwise protected its interests. Flagstaff was not given a blank check. Likewise the statement in the Allen and Wolf Affidavits that "GECC did not know that Flagstaff would not have been able to make timely payments of its payroll taxes" is taken by this court as merely indicating that GECC did not know the taxes had not been included in the budget projections against which funds were advanced. GECC certainly knew Flagstaff had and has no...