In re General Oil Distributors, Inc.

Decision Date29 March 1982
Docket NumberBankruptcy No. 882-80516-20.
Citation18 BR 654
PartiesIn re GENERAL OIL DISTRIBUTORS, INC., et al., Debtors.
CourtU.S. Bankruptcy Court — Eastern District of New York

Levin & Weintraub, Weisman, Celler, Spett, Modlin & Wertheimer, New York City, for debtor; Barry Seidel, Steven L. Cohen, New York City, of counsel.

Kaye Scholer, Fierman, Hays & Handler, Attys. for Marine Midland Bank, New York City, Gerald Feller, New York City, of counsel.

New York City Law Dept. Office of the Corp. Counsel, New York City; Arnold Fox, New York City, of counsel.

Brener, Wallack & Hill, Princeton, N.J., for Royal Petroleum Corp.; Nathan M. Edelstein, Princeton, N.J., of counsel.

Paul, Weiss, Rifkind, Wharton & Garrison, New York City, for Northville Caribbean Corp.; Jay Himes, New York City, of counsel.

Gehrig, Ritter, Melville, N.Y., Cable, McDaniel, Bowie & Bond, Baltimore, Md., for Crown Central Petroleum Corp. by Morton A. Sacks, Baltimore, Md., Craig R. Olsen, Melville, N.Y., of counsel.

Gordon, Hurwitz, Butowski, Baker, Weitzen & Shalov, New York City, for Tipco Products Co., Mt. Airy Trading Co., The Augsbury Corp., Koch Fuels, Inc.; Kent T. Stauffer, New York City, of counsel.

ROBERT JOHN HALL, Bankruptcy Judge.

General Oil Distributors, Inc. ("General") moves this Court for authorization to assume its executory contract for the sale of oil to the City of New York ("the City"). Authorization is denied.

The instant case was commenced by the filing of an involuntary petition under Chapter 7 of the Bankruptcy Code, 11 U.S.C. § 701 et seq. (Supp. IV 1980) on 3 March 1982 which was followed two days later by General's conversion to a voluntary petition under Chapter 11. See id. at § 706(a).

Thereafter, by orders to show cause dated 10 and 12 March 1982 and returnable on March 15, General moved for Court approval of a financing package which General had negotiated with Marine Midland Bank, N.A. ("Marine"), its prebankruptcy financier, and for authorization to assume its executory contract with the City.1

Hearings on the consolidated motions were held on March 15 and 17-19, at which time the Court denied authorization to assume the contract, whereupon General withdrew its application for approval of the financing package.2

In accordance with Bankruptcy Rules 752 and 914, the Court is now filing its Findings of Fact3 and Conclusions of Law.

General is one of about a half dozen subsidiaries of Southville Oil Corporation, a holding company all of whose stock is owned equally by the brothers Allen and Gerald Wechter. Like General, some of these subsidiaries buy and sell petroleum products. Others own and operate petroleum storage facilities which are apparently analogous to warehouses. At present, in addition to General, Wechter Petroleum Corporation ("Wechter"), Southville Industries Corporation ("Southville") and Inwood Trucking Corporation ("Inwood") are operating as debtors-in-possession under Chapter 11.4

Prior to General's filing, General had a financing arrangement with Marine under which, in return for a continuing security interest in all of General's accounts receivable, Marine would advance General 80% of those accounts classified as "eligible" at an interest rate of 3% over prime. In addition, General's obligations to Marine are guaranteed by both Inwood and Southville.

Although apparently successful in the past, General has more recently found itself in financial difficulties due to several factors: first, General apparently lost large sums of money speculating in the commodities market; second, the brothers found themselves engaged in a power struggle for control of the holding company with the concomitant legal expense such entails; and third, a buyer refused to pay for some $1,000,000 of petroleum products allegedly sold and delivered to it by General claiming a set-off.

Consequently, on 10 March 1982, General represented to this Court that it was out of money, out of oil and out of time and requested ex parte authorization to borrow $300,000.00 from Marine to avoid immediately defaulting on its standing contracts. In return for this loan, Marine was to be granted, inter alia, a security interest in General's postpetition accounts receivable,5 the right to collect these in reduction of General's outstanding prepetition obligations to Marine and the vacatur of the automatic stay that it might collect on the prepetition receivables (upon which it already had a security interest). Based on General's representations of an emergency situation, ex parte approval was granted6 and a hearing on General's request for authorization to borrow an additional $400,000 on like terms was scheduled for 15 March 1982 on notice to General's 14 largest unsecured creditors.7

At the hearing, General testified by Gerald Wechter that the intra family dispute between he and his brother had been reconciled and that General was no longer speculating in the commodities market. General then offered a program of cost cutting under which it projected a monthly cost reduction of $107,000. Finally, General argued that a cash infusion of $700,000 coupled with the re-activation of the Marine accounts receivable financing arrangement would enable it, in light of its proposed cost rehabilitative posture, to embark on a successful reorganization.

The creditors8 were uniform in rejecting this analysis. Although presumably representing diverse interests and without the benefit of a creditors' committee (which had not yet been formed), the creditors took umbrage with General's projections. One of the creditors, Northville Caribbean Corporation ("NCC"), cross-examined Gerald Wechter on the basis of General's figures suggesting that they in fact foretold a cash flow deficiency of over $100,000 over the next three months. See NCC exhibits 1-9.9

Although probably insufficient by itself to short circuit General's reorganization plans, this counter analysis by NCC was then greatly buttressed by the revelation that General had borrowed (without Court approval) an additional $300,000 in petroleum products from apparently sympathetic competitors during the pendency of these hearings that General might avoid defaulting further on its contracts. Although this fact supported General's contention that a true emergency (in terms of General's survival) existed, it concurrently confirmed NCC's position that a $700,000 cash infusion would do little to keep this company alive. In other words, General was now shown to have already received $600,000 ($300,000 in cash from Marine and $300,000 in products from competitors) while forced to admit that it was once again out of money and oil only one week later.

It is against this factual background that General asked for authorization to assume its contract with the City of New York.

The City Contract

The City contract, which had been awarded to General through competitive bidding, commenced on 1 July 1981 and terminates on 30 June 1982. The contract calls for the supplying by General of, inter alia, 1,200,000 gallons of # 2-D fuel oil to the Newtown Creek Water Pollution Control Plant ("Newtown Creek"), 4,000,000 gallons of # 2-D fuel oil to the Staten Island Ferry Terminal ("the Ferry") and 500,000 gallons of # 2-D fuel oil to the Wards Island Water Pollution Control Plant ("Wards Island"). Moreover, this contract provides for a fixed price per gallon over its life. Consequently, the present drop in the market price of oil makes this contract a valuable asset to General who therefore sought to assume it. Conversely, the City preferred to have it terminated that they might solicit newer (and presumably lower) bids on the balance of the contract term.

Section 365(b)(1) provides the tripartite conditions precedent for the assumption of an executory contract by a debtor-in-possession. In re Lafayette Radio Electronics Corporation, 9 B.R. 993, 997 (Bkrtcy.E.D.N. Y.1981); In re Luce Industries, Inc., 8 B.R. 100, 105 (Bkrtcy.S.D.N.Y.1980).

Section 365(b)(1) provides:

If there has been a default in an executory contract or unexpired lease of the debtor, the trustee may not assume such contract or lease unless, at the time of assumption of such contract or lease, the trustee
(A) cures, or provides adequate assurance that the trustee will promptly cure, such default;
(B) compensates, or provides adequate

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