In Re Global Technovations Inc.

Decision Date02 July 2010
Docket Number01-64771.,Bankruptcy No. 02-40447,Adversary No. 03-5078.
Citation431 B.R. 739
PartiesIn re GLOBAL TECHNOVATIONS, INC., et al., Debtors.In re Onkyo America, Inc., Debtor.Global Technovations, Inc. and Kenneth Nathan, Liquidating Agent for Onkyo America, Inc., Plaintiffs,v.Onkyo U.S.A. Corporation, Onkyo Europe Electronics Gmbh, Onkyo Malaysia Sdn. Bdh., Onkyo Electric (Malaysia) Sdn. Bdh., and Onkyo Corporation, Defendants.
CourtU.S. Bankruptcy Court — Eastern District of Michigan

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Deborah Kovsky-Apap, Robert S. Hertzberg, Pepper Hamilton LLP, Detroit, MI, for Plaintiffs.

Donald J. Hutchinson, Detroit, MI, for Defendants.

AMENDED TRIAL OPINION**

THOMAS J. TUCKER, Bankruptcy Judge.

In this adversary proceeding, Plaintiff Global Technovations, Inc. (GTI) seeks to avoid, as a fraudulent transfer under 11 U.S.C. § 544(b) and Florida law, a $13 million payment it made and $12 million in obligations it incurred, to purchase 5,900 shares of common stock of Onkyo America, Inc. GTI purchased the stock from Defendants Onkyo Europe Electronics GMBH (Onkyo Europe); Onkyo Malaysia SDN. BDH. (“Onkyo Malaysia”); and Onkyo Corporation (Onkyo Japan) (collectively “the Onkyo Defendants). GTI also seeks the disallowance of the claims filed by the Onkyo Defendants in GTI's bankruptcy case, under 11 U.S.C. § 502(d).

The Court conducted a bench trial spread over 18 days, amounting to the equivalent of roughly 13 full days of trial time. This opinion states the Court's findings of fact and conclusions of law.

For the reasons stated below, the Court finds for Plaintiff GTI and will, among other things, enter judgment for GTI in the amount of $6.1 million, plus interest.

I. Introduction and backgroundA. The parties and their sale transaction

The Chapter 11 Debtor Onkyo America, Inc. (OAI) was a manufacturer and supplier of automotive speakers. On June 29, 2000, GTI as the Buyer, and the Onkyo Defendants, as the Sellers, and OAI entered into a “Share Purchase Agreement” (the “Agreement”), under which GTI agreed to purchase all of the outstanding shares of common stock (5,900 shares) of OAI from the Onkyo Defendants. The Agreement was amended by a letter agreement dated August 3, 2000. Under the Agreement as amended, GTI agreed to purchase the OAI stock for $25 million, plus up to an additional $15 million that was contingent on an “Earn-Out Formula” set forth in the Agreement, based on OAI meeting certain future earnings thresholds.

The sale closed on August 31, 2000. At closing, GTI paid $13 million in cash, by wire transfer, to an agent of the Onkyo Defendants, for the benefit of the Onkyo Defendants. GTI also executed and delivered three promissory notes, each dated August 31, 2000 and payable in August 2003, for the $12 million balance of the $25 million portion of the purchase price. The promissory notes were: (a) a $4.2 million note payable to Onkyo Europe for its 2,065 shares of OAI stock; (b) a $4.2 million note payable to Onkyo Malaysia for its 2,065 shares of OAI stock; and (c) a $3.6 million note payable to Onkyo Japan for its 1,770 shares of OAI stock.

Soon after the closing, the financial condition of both OAI and GTI worsened. GTI negotiated with Defendant Onkyo Japan for amendments to the OAI acquisition transaction. As a result, the parties further amended the Agreement, by a letter agreement dated January 6, 2001. The amendment: (1) reduced the principal amount owing under the promissory note to Onkyo Japan by $1 million and forgave the interest that had accrued on the $1 million; (2) deferred payment of inter-company obligations OAI owed to Onkyo Japan under Section 17.01 of the Agreement, from May 31, 2001 until March 10, 2002; and (3) required GTI and OAI to execute and deliver a General Release, under which GTI and OAI released the Onkyo Defendants from claims relating to the Agreement. 2

B. The GTI and OAI bankruptcies

After these amendments were made to the Agreement, OAI's financial condition continued to deteriorate. In October 2001, OAI's secured lender GMAC, essentially took over the day-to-day operations of OAI, with the help of its financial advisor, BBK, Ltd.

On November 21, 2001, GTI, by its President and Chief Executive Officer, Will Willis, wrote a letter to Onkyo Japan discussing the possibility of OAI being forced into bankruptcy, and of GTI filing bankruptcy in order to set aside the OAI acquisition as a fraudulent transfer.

On December 18, 2001, GTI and its affiliates, On-Site Analysis, Inc.; Top Source Oil Analysis, Inc.; Top Source Automotive, Inc.; and ARCS Safety Seat, Inc., filed voluntary petitions for relief under Chapter 11.3 The next day, GTI's wholly-owned subsidiary, OAI, filed a voluntary petition for relief under Chapter 11.4

The Onkyo Defendants each filed proofs of claim in the GTI bankruptcy case. Onkyo Europe and Onkyo Malaysia each filed a proof of claim in the amount of $4,229,891.00; and Onkyo Japan filed a proof of claim in the amount of $3,625,621.08. (PTO p. 4).5

On February 21, 2003, the Court entered a confirmation order that confirmed the Plan of Reorganization of GTI and its affiliated Debtors (the “GTI Plan”). Under the confirmed GTI Plan, GTI is vested with all assets of the GTI Debtors including all causes of action arising under chapter 5 of the Bankruptcy Code. (R. 5/15 pp. 4-7).6

C. The claims in this adversary proceeding, and course of proceedings

After Plaintiffs GTI and Kenneth Nathan, the Liquidating Agent for OAI, filed this adversary proceeding, they filed a First Amended Complaint (Docket # 154), which contained six counts:

• Counts I and II, in which GTI seeks to avoid and recover, as fraudulent transfers, transfers GTI made and the obligations it incurred to the Onkyo Defendants and Onkyo U.S.A. as part of its acquisition of the OAI common stock;
• Counts III and IV, in which GTI and Plaintiff Kenneth Nathan, as Liquidating Agent for OAI, seek to avoid, as a fraudulent transfer, the General Release that GTI and OAI gave to the Onkyo Defendants under the 2001 amendment to the Agreement, described above;
• Count V, in which Kenneth Nathan seeks to avoid as preferences, and recover, five payments OAI made to Onkyo Electric (Malaysia) SDN. BDH.; and
• Count VI, in which GTI and Kenneth Nathan seek disallowance of the claims filed by the Onkyo Defendants and Onkyo Electric (Malaysia) SDN. BDH., based on 11 U.S.C. § 502(d), because the Onkyo Defendants and Onkyo Electric (Malaysia) SDN. BDH. allegedly possess property of the estates of GTI and OAI that can be recovered under 11 U.S.C. § 550, and are “transferee[s] of a transfer avoidable under section 544 of the Bankruptcy Code.”

Plaintiff Nathan and Defendants Onkyo U.S.A. Corporation and Onkyo Electric (Malaysia) SDN. BDH. are no longer parties to this action. On April 1, 2006, the Court granted summary judgment for Onkyo USA Corporation on all claims against it (Docket # 150). On April 7, 2006, the Court entered a stipulated order (Docket # 168), which dismissed Counts III and IV of the complaint as between Nathan and Onkyo Electric (Malaysia) SDN. BDH., which were related to the General Release given by GTI and OAI. That stipulated order also provided that the General Release could not be asserted as a defense to Counts I and II. As a result of these orders, only Counts I, II, and VI between Plaintiff GTI and the three Onkyo Defendants remain.

Before trial, the Onkyo Defendants filed a motion to dismiss the claims against them and for monetary sanctions, based on GTI's alleged spoliation of evidence. The motion alleged that [m]ost of the documents relevant and material to this lawsuit were lost or destroyed while in the exclusive control of the [P]laintiffs.” 7 The motion claimed that the loss of these documents prejudices the Onkyo Defendants and “undercuts the Onkyo Defendants' ability to defend this action.” 8 Alternatively, the motion argued, if the case is not dismissed, Defendants are entitled to the following evidentiary presumptions at trial: “that (1) the [so-called] GTI Acquisition Model reflects the reasonable expectations and projections of the Plaintiffs at the time of the acquisition; and (2) that the destroyed and/or missing documents would be detrimental to the plaintiffs' claims.” 9 The Court held a hearing, and denied the motion without prejudice to Defendants' right to request such relief as part of their defense at trial.10

Trial was held, and Defendants renewed their spoliation motion. After the trial concluded, the parties filed several statements of post-trial supplemental authority,11 and supplemental briefs on the spoliation issues,12 all of which the Court has considered, along with the rest of the record, in making its decision.

II. Jurisdiction and venue

This Court has subject matter jurisdiction over this adversary proceeding under 28 U.S.C. §§ 1334(b), 157(a) and 157(b)(1), and Local Rule 83.50(a) (E.D.Mich.). Counts I and II of GTI's First Amended Complaint seek to avoid a fraudulent transfer and fraudulent obligations under the combination of 11 U.S.C. § 544(b)(1) and Florida fraudulent transfer statutes. As such, these claims are core proceedings under 28 U.S.C. § 157(b)(2)(H). See Bliss Technologies, Inc. v. HMI Industries, Inc. (In re Bliss Technologies, Inc.), 307 B.R. 598, 603-06 (Bankr.E.D.Mich.2004). Count VI of GTI's First Amended Complaint seeks disallowance of Defendants' claims filed in the GTI bankruptcy case, based on 11 U.S.C. § 502(d). As such, this claim is a core proceeding under 28 U.S.C. § 157(b)(2)(B).13

Venue is proper under 28 U.S.C. § 1409(a), and is not disputed.

III. Facts14

The Court finds the following facts, and the facts stated elsewhere in this opinion, all based on a review of all of the evidence presented at trial- i.e., all of the testimony and exhibits admitted into evidence-and the Court's assessment of the credibility...

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