IN RE HEILIG-MEYERS CO

• Citation: 319 B.R. 447
• Decision Date: 21 December 2004
• Docket Number: Adversary No. 02-6158-DOT.,Bankruptcy No. 00-34533 DOT to 00-34538-DOT.
• Parties: In re HEILIG-MEYERS COMPANY, et al., Debtors. Heilig-Meyers Company, et al., Plaintiffs, v. Wachovia Bank, N.A., f/k/a First Union National Bank and as successor by merger to Wachovia Bank, N.A., both as agent and individually; Wachovia Securities, Inc., f/k/a Wachovia Capital Markets, Inc.; Bank of America, N.A.; Crestar Bank; SunTrust Bank; The Fuji Bank, Ltd.; First Chicago, f/k/a The First National Bank of Chicago; Credit Lyonnais, New York Branch; The Bank of Tokyo-Mitsubishi, Ltd.; MLO CLO XIX Sterling (Cayman), Ltd.; PNC Bank, National Association; Prudential Insurance Company of America; Pruco Life Insurance Company; DOE Wachovia Certificate Holders Nos. 1-1,000; and DOE FUNB Certificate Holders Nos. 1-1,000, Defendants.
• Court: United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — Eastern District of Virginia

319 B.R. 447

In re HEILIG-MEYERS COMPANY, et al., Debtors Heilig-Meyers Company, et al., Plaintiffs, v. Wachovia Bank, N.A., f/k/a First Union National Bank and as successor by merger to Wachovia Bank, N.A., both as agent and individually; Wachovia Securities, Inc., f/k/a Wachovia Capital Markets, Inc.; Bank of America, N.A.; Crestar Bank; SunTrust Bank; The Fuji Bank, Ltd.; First Chicago, f/k/a The First National Bank of Chicago; Credit Lyonnais, New York Branch; The Bank of Tokyo-Mitsubishi, Ltd.; MLO CLO XIX Sterling (Cayman), Ltd.; PNC Bank, National Association; Prudential Insurance Company of America; Pruco Life Insurance Company; DOE Wachovia Certificate Holders Nos. 1-1,000; and DOE FUNB Certificate Holders Nos. 1-1,000, Defendants.

Bankruptcy Nos. 00-34533 DOT to 00-34538-DOT. Adversary No. 02-6158-DOT.

United States Bankruptcy Court, E.D. Virginia, Richmond Division.

December 21, 2004.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Bruce H. Matson, Richmond, VA, for Debtors.

Scott L. Baena, Bilzin, Sumberg, Baena, Price & Axelrod LLP, Miami, FL, Special Counsel for Debtors.

Kevin R. Huennekens, Kutak, Rock LLP, Richmond, VA, for Wachovia Bank, N.A.

David D. Hopper, Cook, Heyward, Lee, Hopper & Feehan, P.C., Richmond, VA, for Prudential Insurance Company of America and Pruco Life Ins.

REVISED MEMORANDUM OPINION

DOUGLAS O. TICE, JR., Chief Judge.

A trial over 10 days was held in November 2003 on plaintiff debtors' amended complaint to avoid allegedly preferential or fraudulent cash transfers and grants of liens made to defendants, a group of debtors' pre-petition secured creditors. The transfers at issue were made on May 25, 2000, as part of a major financial restructuring of the debtors. The issues for decision are (1) whether debtors were insolvent on a consolidated basis on May 25, 2000; (2) whether the defendant lenders were entitled to a new value defense with regard to the allegedly preferential cash transfers and liens; and (3) whether the lenders were entitled to an ordinary course of business defense with regard to the allegedly preferential cash transfers. Following the conclusion of the trial, the court took ruling under advisement. The parties have submitted voluminous post-trial proposed findings and memoranda of law.

For the reasons stated below the court holds that debtors were solvent on May 25, 2000, and the cash transfers and grants of liens were therefore neither preferential nor fraudulent. This ruling precludes the necessity for the court to considers defendants' affirmative defenses.

PROCEDURAL HISTORY

On August 16, 2000, Heilig-Meyers Company and five of its wholly-owned subsidiaries filed their respective voluntary chapter 11 petitions. On the same date, the court entered an order authorizing the joint administration of the debtors' cases for procedural purposes only.

The official committee of unsecured creditors filed the initial complaint in this adversary proceeding on July 29, 2002, seeking the avoidance of cash transfers, liens, guaranties, and super-priority claims made or granted by debtors to the defendant lenders as a result of a restructuring on May 25, 2000. The committee filed an amended complaint on November 7, 2002. Through its amended complaint the committee sought:

(a) avoidance of the cash transfers and liens made or granted to the lenders as preferential transfers;

(b) avoidance of the cash transfers and liens made or granted to the lenders as fraudulent transfers (c) avoidance of the guaranties granted to the lenders as fraudulent transfers;

(d) avoidance of the replacement liens granted to the lenders pursuant to the terms of adequate protection orders filed in debtors' main bankruptcy case;

(e) disallowance of the super-priority claim granted to the lenders pursuant to the terms of adequate protection orders filed in debtors' main bankruptcy case;

(f) disgorgement of the avoidable cash transfers;

(g) disgorgement of professional fees from the lenders pursuant to the terms of adequate protection orders filed in debtors' main bankruptcy case;

(h) turnover of estate assets; and

(i) a judgment declaring the lenders' liens invalid and fixing the amount of the lenders' unsecured claims.

By order of the court dated December 18, 2002, debtors were substituted for the committee as plaintiffs in this adversary proceeding.

On July 23, 2003, debtors filed a motion for partial summary judgment as to the avoidability under 11 U.S.C. §§ 547, 550, and 551 of cash transfers and liens made and granted by debtors to the lenders as a result of the May 25, 2000, restructuring. On October 29, 2003, the court made a partial ruling on the summary judgment motion and entered an order denying summary judgment as to the cash transfers made by debtors to the lenders known as the Berrios proceeds.¹ On December 31, 2003, the court ruled on the other issues raised by debtors' summary judgment and entered an order adopting an opinion with findings submitted by the lenders. The court ruled that:

(1) $20,000,000 of liens transferred by debtor Furniture Company as a result of the debtors' May 25, 2000, restructuring were on account of antecedent debt;

(2) the benefits received by debtors as a result of the May 25, 2000, restructuring were not sufficient to establish the lenders' contemporaneous exchange for new value defense;

(3) the lenders were not entitled to an ordinary course of business defense with regard to the liens granted as a result of the May 25, 2000, restructuring because their securitization of previously unsecured debt was inconsistent with the parties' past practices; and

(4) debtors had withdrawn the portion of their motion for summary judgment regarding new value and ordinary course defenses to cash payments made on the lenders' revolving line of credit.

The lenders filed their own motion for summary judgment on September 25, 2003. They sought summary judgment as to the appropriate valuation standard to be used in the insolvency analysis of debtors and to establish that the lenders had provided sufficient evidence of debtors' solvency on May 25, 2000, to rebut the initial presumption of debtors' insolvency under 11 U.S.C. § 547(f).² Hearing was held October 10, 2003, and the court ruled from the bench that the motion was granted as to the lenders' having rebutted the initial presumption of insolvency, but the motion was denied as to determining the proper valuation standard for the insolvency analysis. Accordingly, the court entered a memorandum opinion and order on December 9, 2003, granting in part and denying in part the lenders' motion for summary judgment.

The court's orders and opinions entered December 18, 2002, October 29, 2003, December 9, 2003, and December 31, 2003, are incorporated in this opinion.

Trial on the amended complaint was held November 3-7, 10, 13-14, and 17-18, 2003. At the conclusion of the trial the court took all issues under advisement. Based upon the court's rulings on the two motions for summary judgment, only three issues remained for trial: (1) whether debtors were insolvent on May 25, 2000; (2) whether the lenders were entitled to a new value defense with regard to the allegedly preferential cash transfers and liens; and (3) whether the lenders were entitled to an ordinary course of business defense with regard to the allegedly preferential cash transfers. Following trial, the parties filed post-trial memoranda of law and proposed findings of fact and conclusions of law and, later, reply memoranda of law.

FINDINGS OF FACT

Heilig-Meyers Company

Heilig-Meyers Company, a publicly-held Virginia corporation, is a retailer of home furnishings whose predecessors date back to 1913. The company has five subsidiaries including Heilig-Meyers Furniture Company, a North Carolina corporation; Heilig-Meyers Furniture West, Inc., an Arizona corporation; HMY Star, Inc., a Virginia corporation; HMY RoomStore, Inc., a Virginia corporation; and MacSaver Financial Services, Inc., a Delaware corporation.

Heilig-Meyers and its subsidiaries historically located stores in smaller towns and rural markets in the United States, tailoring their business to lower and middle income consumers. The majority of retail sales were made through the company's offering of installment credit programs, often to customers who typically did not qualify for credit elsewhere. This credit function was managed store-bystore, with each location being responsible for extending credit and collecting payments in accordance with general corporate guidelines. Uniquely, customers typically made their payments in person at their local stores, and the companies did not send bills or invoices to their customers.

Over the years Heilig-Meyers expanded broadly beyond its original base in Virginia and North Carolina through a series of acquisitions and by penetrating new markets. The corporate structure that evolved was comprised of publicly-held Heilig-Meyers as parent-holding company with other operating companies as whollyowned subsidiaries. By 1998, the consolidated company had become the largest furniture retailer in the United States with more than 1,200 stores in thirty states and reported total annual revenues exceeding $2,000,000,000.

The Lenders

The defendant lenders are a group of debtors' pre-petition secured creditors. The group is comprised of Wachovia Bank, N.A., f/k/a First Union National Bank and successor by merger to Wachovia Bank, N.A.; Wachovia Securities, Inc., f/k/a Wachovia Capital Markets, Inc.; Bank of America, N.A.; SunTrust Bank; Mizuho Holdings, Inc. and Mizuho Corporate Bank, Ltd.; Bank One; Credit Lyonnais, New York Branch; Bank of Tokyo-Mitsubishi, Ltd.; Highland Capital Management, L.P.; PNC Bank, National Association; Prudential Insurance Company of America and Pruco Life Insurance Company; Doe Wachovia Certificate Holders Nos. 1-1,000; and Doe FUNB Certificate Holders Nos. 1-1,000. The lenders served as trustees, agents,...