In re Hydrox Chemical Co.
| Decision Date | 10 April 1996 |
| Docket Number | Bankruptcy No. 95 B 06375. |
| Citation | 194 BR 617 |
| Parties | In re HYDROX CHEMICAL COMPANY, Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
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Abraham Brustein, Smith Williams & Lodge, Chicago, IL, Richard H. Fimoff, Harold L. Moskowitz, Robbins Salomon & Patt, Chicago, IL, for Debtor.
Joseph Cohen, Gina Krol, Cohen & Krol, Chicago, IL, Trustee.
Kathryn E. Korn, Di Leonardi & Broihier, Des Plaines, IL, for DiLeonardi & Broihier, Ltd.
Philip W. Sandler, Chicago, IL.
Keevan D. Morgan, Morgan & Bley, Chicago, IL, for Progressive Plastic, Inc.
Dean Harvalis, Diane L. Graham, Office of the U.S. Trustee, Chicago, IL.
Chester Foster, Foster & Kallen, Chicago, IL, for Kappana Ramanandan.
Eugene Crane, Dannen Crane Heyman & Simon, Chicago, IL.
Michael Weininger, Katz Randall & Weinberg, Chicago, IL.
Kevin M. Brill, Chicago, IL, for Guy Srivastiva.
On March 31, 1995, three creditors, including Hatley Sales Corp. and Label-Tek, Inc., filed an involuntary petition against Hydrox Chemical Company, Inc. ("Hydrox" or "Debtor"), producer of health care supplies. Subsequently, American Packaging Products, Inc., Coleman Chemical Company, J.R. Glass & Associates, Poly-Seal Corp., and Progressive Plastics, Inc. joined the petition. (collectively "RICO Claimants"). Debtor consented to an order for relief under Chapter 11 of the Bankruptcy Code. On July 13, 1995, a Chapter 11 trustee was ordered to be appointed.
Hydrox operated its business as a debtor-in-possession pursuant to 11 U.S.C. §§ 1107 and 1108 until a Plan was confirmed. Certain creditors filed claims based upon an alleged scheme perpetrated by the CEO of the debtor, Guyan Srivastiva ("Guy Sri"), in violation of the Federal Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962, et seq. Debtor filed objections to each of the RICO claims.
Two competing plans of reorganization were filed, one by Guy Sri on behalf of Hydrox and its majority shareholders, and one by Ram, who is a minority shareholder of Debtor. The two Plans and a joint Disclosure Statement were distributed to all the creditors of this estate, who were solicited to vote for either Plan.
The disputing parties entered into an Agreed Order Regarding Estimation of Certain Claims for Voting Purposes ("Agreed Order"), fixing timing and procedures for Ballots to be cast in connection with these competing plans.
Pursuant to the provisions of 11 U.S.C. § 502(c) and Bankruptcy Rule 3018(a), the Agreed Order described the procedure to be followed to aid the Court in estimating creditors' pending RICO claims. It provided for filing of detailed claims objections and detailed pleadings of the RICO claims, each supported by documentation, affidavits, depositions, and briefs. The Agreed Order further provided that, upon receipt of submissions from both sides, the RICO claims would be estimated by the Court solely for the purpose of fixing the right of creditors to vote on the competing plans. Such estimation was to be without prejudice to actual litigation of the estimated claims.
Following review of documentation submitted by the parties, for the following reasons the RICO claims were found by prior order to be given a two-thirds chance of success, and therefore each such claim was estimated and temporarily allowed for voting purposes at two-thirds of the amount claimed, that is at twice the amount of damages instead of three times damages as provided in the RICO statute.
On May 15, 1995, RICO claimants filed proofs of claim for cash-on-delivery goods shipped interstate to Hydrox, that were paid with checks drawn on insufficient funds. Together with their claims, the RICO claimants submitted copies of bad checks that were sent as payment or replacement checks for orders made by the debtor.
The RICO claimants claim that Debtor, through Guy Sri, used the United States Postal Service and interstate phone calls in violation of 18 U.S.C. § 1341 and § 1343 to fraudulently induce suppliers to deliver goods and cash on delivery orders. It is asserted that Debtor made specific representations that the RICO claimants would be paid by check for delivery of goods and services. It is alleged that the purpose of the scheme was to defraud the RICO claimants and induce them to make deliveries of goods for which the Debtor and Guy knew payment would never be made, and/or for which they never intended to make payment.
The RICO claims relied on an affidavit submitted by Mr. Molloy, Hydrox's accountant, who described the alleged RICO scheme that Guy Sri had instructed Molloy to follow in February and March, 1994. Allegedly, Hydrox, through Guy, negotiated payment terms with creditors for payment within 45-60 days. Hydrox then would ignore the agreed payment terms and not consider payment before 75 days from the date of invoice. Allegedly, Debtor's personnel were instructed by Guy to try to hold out from paying for at least 90 days. At 90-100 days from date of invoice, if the creditor was pressuring payment, a check was to be written to the customer. Because of the Debtor's large overdrafts averaging daily up to $30,000 at Amcore Bank, and up to $160,000 at the State Bank of India, it was likely that any check actually written was not covered by sufficient funds.
Allegedly, in order to gain time, Hydrox awaited customer notification of this insufficiency before any action was taken. The RICO claimants alleged that another delay tactic was for Debtor's employees to inform creditors to redeposit these non sufficient fund checks ("NSF checks"). If the redeposited check also did not clear, Debtor's employees were to issue a replacement check or to obtain a cashier's check for the customer up to a week later. At times, even these replacement checks were issued on accounts with insufficient funds. Furthermore, after negotiating a promissory note with Progressive Plastics to take care of some of these bad checks, the first payment on that note was also made with an NSF check.
At a deposition, Guy testified that he personally signed 90-95% of these checks in day-to-day operations when he was not on vacation. Ram signed them in his absence. Guy Sri dep. p. 21. Guy Sri also testified that he wrote checks from one overdrawn bank account to another, even though he had no agreement with any bank to pay the overdrafts. Guy Sri dep. p. 14, 19, 20, 31. Amcore, Citibank, and State Bank of India were all used as drawee banks. Molloy's affidavit stated that, by the time the bankruptcy petition was filed, the overdraft amounts had grown to $403,000, and accounts payable to trade vendors amounted to $1,157,964.40 with only 3.28% of this sum being current.
When Guy Sri had personally withdrawn funds from Hydrox in December 1994, causing a shortage of working capital, Efrain O'Campo, the plant manager, loaned the debtor $100,000 to meet payroll expenses. Guy Sri repaid O'Campo with a Hydrox check, that also proved to be drawn on insufficient funds, and O'Campo filed a claim against Debtor.
Proceeds from the sale of products produced from these shipped goods, amounting to approximately $850,230, were transferred to Guy, to Neil Srivastiva (Guy's son), to Madouv, and to Nigam Srivastiva (Guy's brothers), and to three insider companies owned/controlled by Guy (Global, Prima-Tek, and Equine Industries, Ltd.) for little or no consideration at least one year prior to filing of the petition. Molloy Affidavit, Guy Sri Dep. p. 73. From December 1993 onward, Guy also deposited company checks into a First Chicago personal account totaling approximately $100,000 to be wire transferred to another account in India. Molloy Affidavit. In effect, the creditors allege that Guy Sri used Hydrox as his instrumentality to profit for himself, his wife, and their insider companies at the expense of its suppliers and creditors.
Debtor has asserted that all creditors knew and understood that it was probable that the Debtor would not pay on time and acquiesced to the arrangement, thereby eliminating any fraudulent intent or involvement by Guy Sri. Reply p. 5. Furthermore, Debtor argues that the creditors have failed to meet any of the elements required under the RICO statute, in particular pattern, fraud, duration, and causal nexus. Reply p. 13.
Evidence tends to show, subject to actual trial of the claims and final liquidation thereof in the District Court, that the RICO claimants could prove by a preponderance of evidence the elements of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962(a) and (c). For purposes of this claim estimation, the claimants produced documents and testimony which show that Guy Sri perpetrated a pattern of racketeering activity through Hydrox to defraud its creditor and suppliers for personal gain. Consequently, for reasons stated herein, their claims were found to be strong and were estimated to have a two-thirds chance of success.
The temporary allowance of a claim for voting purposes is committed to this Court's reasonable discretion based on Fed. R.Bankr.P. 3018(a), which provides in relevant part that:
. . . notwithstanding objection to a claim or interest, the court after notice and hearing may temporarily allow the claim or interest in an amount which the court deems proper for the purpose of accepting or rejecting a plan.
Section 502(c)(1) of the Bankruptcy Code provides that there shall be estimated for purpose of allowance ". . . any contingent or unliquidated claim, the fixing or liquidation of which would unduly delay the administration of the estate." Neither Rule 3018(a) nor § 502(c)(1) provide any particular method of estimating claims. However,...
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