In re Hagerstown Fiber Ltd. Partnership

• Decision Date: 26 April 2002
• Docket Number: Adversary No. 01-2958(SMB).,Bankruptcy No. 99 B 43051(SMB).
• Citation: 277 B.R. 181
• Parties: In re HAGERSTOWN FIBER LIMITED PARTNERSHIP, Debtor. David R. Kittay, Trustee For Hagerstown Fiber Limited: Partnership, Plaintiff, v. Carl C. Landegger, Pencor First Fiber, Inc., SBCCS Constructors Joint Venture, The Black Clawson Company, Black Clawson Partner, Inc., Simons Engineering, Inc., AMEC E & C Services, Inc., Sea Crest Industries, Inc., Sea Crest Construction Corporation, Peter Scalamandre & Sons, Inc., Peter Bailey, Michael Bach, Joel Feldman, Morrison Cohen Singer & Weinstein, LLP, Robert Strasburg, Landegger Paper Recycling Mill Trust, R.W. Beck & Co., Michael Macaulay, Fidelity & Deposit Company of Maryland, St. Paul Fire and Marine Insurance Company, Seaboard Surety Company, and National Fire Insurance Company of Hartford, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

277 B.R. 181

In re HAGERSTOWN FIBER LIMITED PARTNERSHIP, Debtor David R. Kittay, Trustee For Hagerstown Fiber Limited: Partnership, Plaintiff, v. Carl C. Landegger, Pencor First Fiber, Inc., SBCCS Constructors Joint Venture, The Black Clawson Company, Black Clawson Partner, Inc., Simons Engineering, Inc., AMEC E & C Services, Inc., Sea Crest Industries, Inc., Sea Crest Construction Corporation, Peter Scalamandre & Sons, Inc., Peter Bailey, Michael Bach, Joel Feldman, Morrison Cohen Singer & Weinstein, LLP, Robert Strasburg, Landegger Paper Recycling Mill Trust, R.W. Beck & Co., Michael Macaulay, Fidelity & Deposit Company of Maryland, St. Paul Fire and Marine Insurance Company, Seaboard Surety Company, and National Fire Insurance Company of Hartford, Defendants.

Bankruptcy No. 99 B 43051(SMB).

Adversary No. 01-2958(SMB).

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

April 26, 2002.

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David R. Kittay, Judith L. Siegel, Kittay, Gold & Gershfeld, P.C., Attorneys for Chapter 7 Trustee, White Plains, NY, of Counsel.

Irwin J. Sugarman, Jeffrey S. Sabin, Alan R. Glickman, Sung-Hee Suh, Schulte, Roth & Zabel, LLP, Special Litigation Counsel to Chapter 7 Trustee, New York City, of Counsel.

John M. Callagy, Steven P. Caley, Kevin C. Walker, Kelley, Drye & Warren, LLP, Attorneys for Carl C. Landegger, Pencor First Fiber, Inc., The Black Clawson Company, Black Clawson Partner, Inc., Michael Bach, Robert Strasburg and Landegger Paper Recycling Mill Trust, New York City, of Counsel.

Daniel A. Lowenthal, Pillsbury Winthrop, LLP, Co-Counsel to SBCCS Constructors Joint Venture, New York City, of Counsel.

Michael Schatzow, Venable, Baejter & Howard, LLP, Co-Counsel to SBCCS Constructors Joint Venture, Baltimore, MD, of Counsel.

Alan J. Lipkin, Willkie, Farr and Gallagher, Attorneys for the Unofficial Bondholders' Committee, New York City, of Counsel.

James A. Pardo, Jr., Jeannie R. Rubin, Mark M. Maloney, King & Spalding, Attorneys for Simons Engineering, Inc., AMEC E & C Services, Inc. and Peter Bailey, Atlanta, GA, of Counsel.

Office of the United States Trustee, Patricia H. Schrage, New York City, of Counsel.

John Simoni, Goetz, Fitzpatrick, Most & Bruckman, LLP, Attorneys for Sea Crest Industries, Inc., Sea Crest Construction Corporation, Peter Scalamandre & Sons, Inc., St. Paul Fire and Marine Insurance Company, and Seaboard Surety Company, New York City, of Counsel.

Gerald A. Novack, John Sullivan, Mahtab Foroughi, Kirkpatrick & Lockhart, LLP, Attorneys for Joel Feldman and Morrison, Cohen, Singer & Weinstein, LLP, New York City, of Counsel.

Darren F. Farrington, Mark G. Ledwin, Wilson, Elser, Moskowitz, Edelman & Dicker, LLP, Attorneys for R.W. Beck & Co. and Michael Macaulay, White Plains, NY, of Counsel.

Irving H. Picard, Gibbons, Del Deo, Dolan, Griffinger & Vecchione, P.C., Co-Counsel to Fidelity & Deposit Company of Maryland and National Fire Insurance Company of Hartford, New York City, of Counsel.

Steven K. Davidson, Steptoe & Johnson, LLP, Co-Counsel to Fidelity & Deposit Company of Maryland and National Fire Insurance Company of Hartford, Washington, DC, of Counsel.

MEMORANDUM DECISION GRANTING IN PART AND DENYING IN PART MOTIONS FOR ORDERS COMPELLING ARBITRATION AND FOR STAY OF ADVERSARY PROCEEDING PENDING ITS COMPLETION AND GRANTING STAY RELIEF TO PROSECUTE ARBITRATION

STUART M. BERNSTEIN, Chief Judge.

The chapter 7 trustee of Hagerstown Fiber Limited Partnership commenced this adversary proceeding to assert the estate's claims against multiple parties arising in connection with the construction and operation of a waste paper treatment facility (the "Mill," "Project," "Plant" or "Facility"). SBCCS Constructors Joint Venture ("SBCCS"), the defendant that built the Plant, has moved to stay the adversary proceeding and compel arbitration pursuant to the arbitration clause contained in the construction contract between the SBCCS and the debtor. Substantially all of the other defendants have either joined in that stay motion, or moved separately for the same relief.

The trustee's Objection to Claims, Counterclaims and Complaint, dated July 20, 2001 (the "Complaint") charges, in the main, that SBCCS failed to build and turn over a Plant that met the requirements of the parties' contract. Instead, using fraud and other improper means, SBCCS manipulated the criteria for judging its performance, concealed its breaches and duped the debtor into accepting a substandard Project. These claims are arbitrable, and will be stayed. Similarly, the stay will extend to the claims against the other defendants who allegedly participated or assisted SBCCS.

The Complaint further charges that during the 91 day period following Commercial Operation (defined below), when SBCCS was contractually liable for operating losses, SBCCS and other defendants entered into secret agreements to maximize the cash receipts and minimize the payment of expenses. These actions created a false illusion of profitability, and harmed the debtor. Since these claims concern the extent of SBCCS's contractual liability for operating shortfalls, they are also arbitrable. SBCCS is entitled to a mirror image stay of the adversary proceeding, and once again, the stay extends to the other defendants who are alleged to have participated in this scheme.

Finally, the Complaint maintains that the defendants other than SBCCS improperly operated the Mill for the approximate six months after Commercial Operation, and committed other wrongful acts unrelated to SBCCS's performance or the question of the parties' rights and obligations under the construction contract. These claims are not subject to arbitration, and will not be stayed.

BACKGROUND¹

The debtor, a Maryland limited partnership, was formed to acquire, construct, own and operate the Mill. (See Complaint ¶ 22.) Its affairs were conducted pursuant to an Amended and Restated Agreement of Limited Partnership (the "Partnership Agreement") executed as of September 30, 1994. The debtor's sole general partner was the defendant, Pencor First Fiber, Inc. ("PFF"), a wholly-owned subsidiary of the defendant, The Black Clawson Company ("Black Clawson").² PFF owned a one percent partnership interest. The limited partners included Black Clawson (32.33% partnership interest), SBCCS (5% partnership interest) and the Class C Limited Partners (collectively, a 61.67% partnership interest). (Id. ¶¶ 79-80.)

The principal force behind the debtor and the Mill was the defendant, Carl C. Landegger, a well-known figure in the paper industry. (See id. ¶ 3.) He was the Chairman of the Board and the controlling shareholder of Black Clawson, (id. ¶ 25), and hence PFF, and held interests in several other entities, described below, that figured in the operations of the Mill. (See id. ¶ 24.) His holdings also gave him an indirect interest in SBCCS.³

Under § 4.01 of the Partnership Agreement, PFF was given broad authority to manage the debtor's affairs, with certain exceptions involving either "Major Decisions" or matters involving the debtor and various PFF affiliates. (Id. ¶¶ 81-83.) Major Decisions required the approval of the majority-in-interest of the non-PFF affiliated limited partners.⁴ (Id. ¶ 82.) In addition, several agreements, most notably the construction contract discussed immediately below and the operation and maintenance contract considered elsewhere, completely removed PFF from the decision making process regarding dealings between the debtor, on the one hand, and SBCCS or 1st Urban Fiber Operations ("FUFO"), the Mill operator and Landegger affiliate, on the other. In those cases, the decisions would be made by an agent of the non-affiliated limited partners, referred to either as the Limited Partners' Agent or the Owner's Representative. (Id. ¶ 85.)

A. The Relevant Agreements

On September 30, 1994, the debtor and SBCCS entered into an Amended and Restated Design, Engineering, Procurement and Construction Agreement (the "EPC Agreement"), the principal contract document in the case.⁵ SBCCS agreed to construct a waste paper pulping and deinking facility and waste water treatment plant in Hagerstown, Maryland. In exchange, the debtor agreed to pay SBCCS $131 million. (See id. ¶ 3.)

The EPC Agreement measured the progress of the Plant's construction by a number of milestones. The two most significant were "Mechanical Completion" and "Commercial Operation." Pursuant to § 5.1 of the EPC Agreement, the Plant achieved "Mechanical Completion" when, among other things: (a) all materials and equipment were installed substantially in accordance with the facility design, and (b) SBCCS and the debtor agreed on a "Preliminary Punch List" of uncompleted items. When SBCCS met these requirements, it could deliver a certificate to the debtor certifying Mechanical Completion. The Independent Engineer, defendant R.H. Beck & Co. ("Beck"), could then approve or object to the certificate. (Id. ¶¶ 6, 69.)

Achieving Mechanical Completion carried significant financial consequences under the EPC Agreement. During the period between Mechanical Completion and Commercial Operation (known as the "Ramp-Up Period"), SBCCS operated the Mill for testing purposes at its own expense, and earned a Ramp-Up Fee of approximately $3.56 million plus any profits realized from the sale of pulp produced during the Ramp-Up Period. (Id. ¶ 70.) More importantly, Mechanical Completion capped SBCCS's liability at approximately $40 million plus certain liquidated damages; before Mechanical Completion, SBCCS's potential contractual liability was unlimited. (Id. ¶ 71.)

The second, pivotal landmark event was Commercial Operation, which SBCCS had to achieve by October 30, 1996. (See id. ¶ 75.) To do so, it had to satisfy two chief conditions. First, SBCCS had to complete construction, except for those items listed on a...