In re Food Fair, Inc.
| Decision Date | 18 March 1981 |
| Docket Number | Bankruptcy No. 78 B 1765. |
| Parties | In re FOOD FAIR, INC., Debtor. |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York |
Levin & Weintraub, New York City, for debtor.
Cabell, Kennedy & French, New York City, for Colgate-Palmolive Co.
Proskauer, Rose, Goetz & Mendelsohn, New York City, for Line of Credit Banks.
Otterbourg, Steindler, Houston & Rosen, New York City, for Creditors Committee.
White & Williams, Philadelphia, Pa., for Central Penn. Nat. Bank.
Gelberg & Kronovet, Shea & Gould, New York City, for Travelers Ins. Co., et al.
Marcus & Angel, Vladeck, Elias, Vladeck & Engelhard, P.C., New York City, for UFCW, et al.
Weil, Gotshal & Manges, New York City, for Revolving Credit Banks.
On October 2, 1978 Food Fair, Inc., J.M. Fields, Inc., Hills Supermarkets, Inc., F.F. Financial Corporation, F.F. Financial Corp. of New Jersey, F.F. Financial Corps. of Florida, Newcorp Supermarkets, Inc., Mark Distribution Corporation, Fixtures and Equipment Leasing Co., Inc., and Drug Pride, Inc., (the Debtors) each filed a petition for an arrangement under Chapter XI, section 322 of the Bankruptcy Act. On that same date this Court entered an order authorizing procedural consolidation and joint administration in accordance with Rules 117 and 11-14 of the Rules of Bankruptcy Procedure. The issue now before this Court is whether these cases should be substantively consolidated so that a single plan of arrangement based on merged assets and liabilities may be filed.
The Debtors filed a notice of motion dated December 9, 1980 which was duly served upon all the creditors of the Debtors who have filed claims in these proceedings or who were listed in the books and records of these Debtors. Hearings on the application were held on February 11 and 20, at which time the Debtors presented their case, supported in their application by the representatives of the consolidated creditors' committee.
Although no opposition to the motion has been filed, this Court is mindful of its duties to scrutinize carefully the evidence offered, In re Commercial Envelope Manufacturing Co., Inc., 3 BCD 647, 648 (S.D.N.Y.1977), as "consolidation in bankruptcy, in the form directed in this case, is no mere instrument of procedural convenience . . . but a measure vitally affecting substantive rights." In re Flora Mir Candy Corporation, 432 F.2d 1060, 1062 (2d Cir. 1978). Based on my knowledge of these proceedings since the filings in October 1978 and on the testimony and exhibits produced at the full day hearing on February 20, this Court concludes that the requirements for substantive consolidation developed by the courts of this circuit have been satisfied, and that the application of the Debtors for an order consolidating the separate proceedings into a single proceeding thereby merging all assets and liabilities, and eliminating all intercompany obligations and guarantees is hereby granted.
Food Fair, Inc. (Food Fair) is a publicaly held corporation whose stock was traded on the New York Stock Exchange prior to the filing of the petitions. All of the other Debtors are wholly owned subsidiaries or divisions of Food Fair either acquired or created to engage in a variety of operations. The extent of Food Fair's involvement in numerous companies was evidenced by a seven page list of Food Fair "related" companies presented at the hearing. (Debtors' Exhibit # 1).
Food Fair is and was primarily engaged in operating a chain of retail supermarkets, now primarily along the southern part of the east coast. Newcorp Supermarket, Inc., (Newcorp) was organized in 1976 so that Food Fair could acquire and operate seventeen "Penn Fruit" supermarkets in the Philadelphia area. In 1977 Hill Supermarkets, Inc. (Hills) was acquired by Food Fair to extend its supermarket operations into Long Island. According to the testimony of Leo Dicandillo, treasurer of Food Fair from 1974-1979, much of the purchasing for all the supermarkets, Food Fair, Newcorp, and Hills, was done centrally through Food Fair and all of the bills, except those small enough to be covered by petty cash, were paid with Food Fair checks. (Debtors' Exhibits 10, 11 and Transcript of February 20 at p. 43). The Hills and Newcorp locations were closed during these proceedings and the proceeds realized from the sale of these holdings are available to satisfy the claims of creditors.
In 1961 Food Fair expanded into general merchandise discounting by acquiring the assets of Fields, a discount chain operating 33 stores along the east coast. Food Fair opened an additional 54 discount stores, many located next to Food Fair Supermarkets on property either owned by or leased to Food Fair. (Tr. at p. 68). From almost the time of acquisition, Food Fair was guaranteeing many of Fields' obligations to its creditors. (Debtors' Exhibits 14, 15). Additionally, Food Fair was advancing money to Fields to cover losses, with approximately $120,000,000 still outstanding from these prepetition advances. By an order of this Court dated October 26, 1978, Food Fair guaranteed all of the obligations of Fields for goods sold and delivered during the Chapter XI proceeding. For that reason, most of the Fields trade creditors have filed duplicate claims, one against Fields and one against Food Fair as guarantor.
It was Food Fair that hired key Fields personnel, including the president and chief executive officer who was required to report to the Food Fair board of directors. (Debtors' Exhibit # 3). As of the date of the filings of the petitions, four of the directors/officers of Fields also held positions as directors/officers of Food Fair, (Debtors' Exhibit # 2), and it was the Food Fair board of directors that determined that the Fields operations should be terminated. (Debtors' Exhibit # 4 — April 11, 1979 minutes).
The remaining Debtors, except Drug Pride, Inc., which is a terminated franchise operation, were companies set up to serve the needs of other Food Fair corporations. Food Fair Financial Corporation and Food Fair Financial Corp. of New Jersey and Florida were real estate holding companies only. Mark Distribution Corporation was the buying arm of Fields, while Fixtures and Equipment Leasing Co., Inc. leased equipment to Fields and Food Fair and the franchisees, and was organized for the tax planning benefits. As evidenced by Food Fair's annual reports, all of the activities of the debtor companies were reported in consolidated statements, at least since 1973 (Debtors' Exhibits 7A-H).
From this brief outline of the prepetition activities of the Debtors in these proceedings, it is not difficult to conclude that by the time of the filings Food Fair had grown into a multitiered corporation with Food Fair and its board of directors at the top. It was the Food Fair board of directors which made the decision that all of the Debtors in this proceeding should petition for relief under Chapter XI (Debtors Exhibit # 5 — October 1, 1978 minutes). As recently noted by the court in In re Vecco Construction Industries, 4 B.R. 407 (Bkrtcy. E.D. Va.1980), the increased need for substantive consolidations is a direct result of the proliferation of corporations such as Food Fair. That court went on to summarize the factors to be weighed in determining whether the motion to consolidate should be granted by the bankruptcy court under its equity power. It has long been recognized that, as no statutory authority grants the court the authority to disregard separate corporate structures and create a single estate for the benefit of creditors, the power to consolidate must derive from the general equity jurisdiction of a court of bankruptcy, Pepper v. Litton, 308 U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281 (1939), as implemented by section 2a(15) of the Bankruptcy Act which authorizes the court to issue orders necessary to carry out the provisions of the Act.
Culled from key cases such as In re Continental Vending Machine Corp., 517 F.2d 997 (2d Cir. 1975), In re Flora Mir Candy Corporation, 432 F.2d 1060 (2d Cir. 1970), Chemical Bank New York Trust Company v. Kheel, 369 F.2d 845 (2d Cir. 1966) and Soviero v. Franklin National Bank of Long Island, 328 F.2d 446 (2d Cir. 1964), the Vecco court listed seven elements to be evaluated:
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