In re FORMTECH INDUSTRIES LLC.

• Decision Date: 17 November 2010
• Docket Number: Adversary No. 10-50186 (MFW).,Bankruptcy No. 09-12964 (MFW).
• Citation: HHI FormTech, LLC v. Magna Powertrain USA, Inc. (In re Formtech Indus. LLC), 439 B.R. 352 (Bankr. Del. 2010)
• Parties: In re FORMTECH INDUSTRIES, LLC, and FormTech Industries Holdings, LLC, Debtors. HHI FormTech, LLC, Plaintiff, v. Magna Powertrain USA, Inc. and Magna Powertrain, Inc., Defendants.
• Court: U.S. Bankruptcy Court — District of Delaware

439 B.R. 352

In re FORMTECH INDUSTRIES, LLC, and FormTech Industries Holdings, LLC, Debtors.HHI FormTech, LLC, Plaintiff,

v.Magna Powertrain USA, Inc. and Magna Powertrain, Inc., Defendants.

Bankruptcy No. 09-12964 (MFW).

Adversary No. 10-50186 (MFW).

United States Bankruptcy Court,D. Delaware.

Nov. 17, 2010.

COPYRIGHT MATERIAL OMITTED.

Lynn M. Brimer, Esquire, Meredith E. Taunt, Esquire, Strobl & Sharp, P.C., Bloomfield Hills, MI, Steven M. Yoder, Esquire, Jeremy W. Ryan, Esquire, Etta R. Wolfe, Esquire, Kristi S. Schubert, Esquire, Potter Anderson & Corroon LLP, Wilmington, DE, for Debtors.

Norman L. Pernick, Esquire, Karen McKinley, Esquire, Cole, Schotz, Meisel, Forman & Leonard, P.A., Wilmington, DE, Mark K. Thomas, Esquire, Jeremy T. Stillings, Esquire, Proskauer Rose LLP, Chicago, IL, for Plaintiff.

Richard M. Apkarian Jr., Esquire, Brian M. Akkashian, Esquire, Kristi A. Katsma, Dikinson Wright PLLC, Detroit, MI, Matthew P. Ward, Esquire, Womble Carlyle Sandridge & Rice PLLC, Wilmington, DE, for Defendants.

MEMORANDUM OPINION ¹

MARY F. WALRATH, Bankruptcy Judge.

Before the Court are the parties' cross motions for summary judgment. The Plaintiff, HHI FormTech, LLC (“HHI”), moves for summary judgment on its Complaint, seeking a declaration that it acquired accounts receivable due from Magna free and clear of setoff or recoupment for damages arising from the Debtors' rejection of Magna's contracts. The Defendants, Magna Powertrain USA, Inc. and Magna Powertrain, Inc. (collectively, “Magna”), move for summary judgment dismissing the Complaint for lack of subject matter jurisdiction. For the reasons set forth below, the Court will deny Magna's Motion and grant HHI's Motion.

I. BACKGROUND

Magna is in the business of automobile manufacturing. Since the 1980's, FormTech Industries, LLC (“FormTech”) sold Magna a variety of machined automobile forgings for main shafts and gears. This supply of parts was documented in a series of “Purchase Orders” that Magna periodically issued to FormTech. The Purchase Orders did not commit Magna to purchase any particular quantity of parts, but rather listed only Magna's part numbers and the then-applicable price for each part. The Purchase Orders furthermore created (pursuant to Magna's Terms and Conditions) an “irrevocable option” under which Magna could place individual orders for automotive parts.

When Magna actually wished to order a specific number of parts, Magna would issue to FormTech a “Release” consistent with the price terms of its Purchase Orders. Each Release would typically (1) identify orders for the subsequent two to eight weeks' purchases, depending on the type of part, and (2) contain estimated quantities for additional weeks, which FormTech would use to forecast and plan its production. After receiving each Release, FormTech shipped to Magna the quantity of parts listed in the Release for that week and issued to Magna an invoice for payment of the goods actually shipped at the pricing in the current Purchase Order.

In late 2008 when it encountered financial distress, FormTech notified its customers, including Magna, that it planned to undergo a major restructuring plan. Magna agreed to an amended supply agreement, which included increased prices on some of the parts FormTech sold. In return, FormTech agreed, among other things, to continue to deliver parts, build an inventory bank of parts, provide access to its financial information, and use its best efforts to provide fifteen days advance notice of any intent to file for bankruptcy.

On August 26, 2009, FormTech and its related entity, FormTech Holdings, LLC (collectively, the “Debtors”), filed petitions for relief under chapter 11 of the Bankruptcy Code. That same day, the Debtors entered into an agreement with HHI, whereby HHI agreed to purchase substantially all of the assets of the Debtors. This purchase agreement was later revised in an amended and restated purchase agreement dated September 30, 2009 (the “APA”). On October 1, 2009, the Court entered an order approving the sale of assets to HHI (the “Sale Order”), and the sale closed on October 2, 2009. From May 2009 to the closing of the asset sale on October 2, 2009, FormTech continued to deliver goods to Magna and complied with its obligations under the amended supply agreement.

On the same day as the sale closing, October 2, 2009, the Debtors filed notices of rejection of contracts with the Court, which included any executory contracts and bailment agreements with Magna. The Court granted the rejection motion on October 30, 2009.

Also on October 2, 2009, HHI sent two letters to Magna advising that HHI had acquired the accounts receivable due from Magna (“Magna Accounts Receivable”) and directing Magna to pay HHI and not the Debtors. On November 12, 2009, counsel for HHI sent an additional letter to Magna's counsel stating that HHI had acquired all of the Debtors' accounts receivable. This letter further demanded payment within five days of an alleged outstanding balance of $4,640,298.17 on the Magna Accounts Receivable. Magna refused to pay and now disputes HHI's right to collect the Magna Accounts Receivable.

On February 3, 2010, HHI initiated this adversary proceeding against Magna. In the Complaint, HHI requests a declaratory judgment that (a) HHI is the owner of the Magna Accounts Receivable; (b) the Sale Order and APA, whereby HHI bought the Debtor's assets “free and clear” of any interests or claims, applies to and is binding upon Magna; and (c) Magna is not entitled to any reduction in the Magna Accounts Receivable due to any alleged damages resulting from the rejection of its contracts by the Debtors. ²

On April 13, 2010, Magna filed a motion for partial summary judgment dismissing the Complaint for lack of subject matter jurisdiction pursuant to Rule 12(b)(1). Magna argues that while the Court does have jurisdiction to determine if HHI acquired the Magna Accounts Receivable, the Court does not have jurisdiction to determine if the sale was free and clear of Magna's alleged setoff and recoupment rights.

On April 21, 2010, HHI responded to Magna's motion and filed a cross motion for partial summary judgment seeking a declaratory judgment that (1) pursuant to the Sale Order and the APA, HHI acquired the Magna Accounts Receivable, and (2) Magna may not offset against or recoup from the Magna Accounts Receivable any rejection damages. The Motions have been fully briefed and are ripe for decision.

II. JURISDICTION

[1] The Court has jurisdiction to determine whether it has subject matter jurisdiction over this adversary proceeding. See, e.g., Chicot County Drainage Dist. v. Baxter State Bank, 308 U.S. 371, 376-77, 60 S.Ct. 317, 84 L.Ed. 329 (1940) (holding that a federal court has authority to determine whether it has subject matter jurisdiction over a dispute).

III. DISCUSSION A. Standards for Summary Judgment

Rule 7056 of the Federal Rules of Bankruptcy Procedure incorporates Rule 56 of the Federal Rules of Civil Procedure in adversary proceedings.

In considering a motion for summary judgment under Rule 56, the court must view the inferences from the record in the light most favorable to the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Hollinger v. Wagner Mining Equip. Co., 667 F.2d 402, 405 (3d Cir.1981). If there does not appear to be a genuine issue as to any material fact and on such facts the movant is entitled to judgment as a matter of law, then the court shall enter judgment in the movant's favor. See, e.g., Celotex Corp. v. Catrett, 477 U.S. 317, 322-24, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Carlson v. Arnot-Ogden Mem'l Hosp., 918 F.2d 411, 413 (3d Cir.1990).

The movant bears the burden of establishing that no genuine issue of material fact exists. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 585 n. 10, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); Integrated Water Res., Inc. v. Shaw Envtl., Inc. (In re IT Group, Inc.), 377 B.R. 471, 475 (Bankr.D.Del.2007). A fact is material when it could “affect the outcome of the suit.” Anderson, 477 U.S. at 248, 106 S.Ct. 2505.

Once the moving party has established a prima facie case in its favor, the non-moving party must go beyond the pleadings and point to specific facts showing more than a scintilla of evidence that there is a genuine issue of fact for trial. See, e.g., Anderson, 477 U.S. at 252, 106 S.Ct. 2505; Matsushita, 475 U.S. at 585-86, 106 S.Ct. 1348; Michaels v. New Jersey, 222 F.3d 118, 121 (3d Cir.2000); Robeson Indus. Corp. v. Hartford Accident & Indem. Co., 178 F.3d 160, 164 (3d Cir.1999). If the moving party offers only speculation and conclusory allegations in support of its motion, the burden is not met. See Ridgewood Bd. of Educ. v. N.E. ex rel. M.E., 172 F.3d 238, 252 (3d Cir.1999). Therefore, when the court determines that the non-moving party has presented no genuine issue of fact, summary judgment may be granted. See Matsushita, 475 U.S. at 587, 106 S.Ct. 1348. B. Subject Matter Jurisdiction

Both parties filed cross motions for summary judgment on the issue of whether the Court has subject matter jurisdiction to determine whether the Magna Accounts Receivable were sold to HHI and whether they are subject to any setoff and recoupment rights Magna may have. The Court will, therefore, consider them together.

[2] [3] A bankruptcy court may exercise jurisdiction over four categories of matters: “(1) cases under title 11, (2) proceedings arising under title 11, (3) proceedings arising in a case under title 11, and (4) proceedings related to a case under title 11.” In re Marcus Hook Dev. Park, Inc., 943 F.2d 261, 264 (3d Cir.1991).

[4] [5] [6] [7] [8] Bankruptcy court jurisdiction is divided into “core” and “non-core” proceedings. Cases under title 11, proceedings arising under title 11, and proceedings arising in a case under title 11 are core...