In re Keene Corp., Bankruptcy No. 93 B 46090 (SMB). Adv. No. 94-8015A.

• Decision Date: 03 March 1994
• Docket Number: Bankruptcy No. 93 B 46090 (SMB). Adv. No. 94-8015A.
• Citation: 164 BR 844
• Parties: In re KEENE CORPORATION, Debtor. KEENE CORPORATION, Plaintiff, v. Jessie D. COLEMAN, et al., Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

164 B.R. 844 (1994)

In re KEENE CORPORATION, Debtor KEENE CORPORATION, Plaintiff, v. Jessie D. COLEMAN, et al., Defendants.

Bankruptcy No. 93 B 46090 (SMB). Adv. No. 94-8015A.

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

March 3, 1994.

COPYRIGHT MATERIAL OMITTED

Berlack Israels & Lieberman (Carole L. Fern, Edward S. Weisflener, Diane C. Beveridge, Janice B. Grubin, of counsel), New York City, Gainsburg & Hirsch, Purchase, NY, for debtor/plaintiff.

Levy Phillips & Konigsberg (Stanley J. Levy, of counsel), New York City, for certain creditors.

Marcus Montgomery Wolfson & Burten, P.C. (Leon C. Marcus, John J. Preefer, of counsel), New York City, for Official Committee of Unsecured Creditors.

Arthur J. Gonzalez, Acting U.S. Trustee (Brian Masumoto, of counsel), New York City.

MEMORANDUM DECISION GRANTING MOTION FOR PRELIMINARY INJUNCTION AND DIRECTING THE APPOINTMENT OF AN EXAMINER

STUART M. BERNSTEIN, Bankruptcy Judge.

The debtor-in-possession, Keene Corporation ("Keene"), seeks declaratory and injunctive relief preventing the continuation of approximately 1,600 lawsuits. Commenced by Keene's creditors and pending throughout the country, the lawsuits challenge the legality of Keene's transfer of over $200 million of its assets to its then affiliates during the 1980s and the subsequent spinning off of certain of these affiliates (collectively the "Wrongful Transfer Claims"). The defendants in these actions are Keene's former parent and former affiliates (collectively the "Corporate Defendants"), and certain of the present and former officers, directors and shareholders of Keene and these companies (collectively the "Individual Defendants"). Keene also seeks an order directing the appointment of an examiner to determine the viability of the Wrongful Transfer Claims.

For the reasons stated below, the Court declares that the automatic stay prevents the continued prosecution of the Wrongful Transfer Claims. Alternatively, the Court enjoins their prosecution and directs the appointment of an examiner under the conditions set forth below.

FACTS

The background relating to the Keene bankruptcy is set forth in this Court's prior opinion denying Keene's motion for unrelated injunctive relief. See Keene Corporation v. Acstar Insurance Co. (In re Keene Corporation), 162 B.R. 935 (Bankr.S.D.N.Y.1994). The Court assumes that the reader is familiar with those facts, and will not repeat them.

The Wrongful Transfer Claims concern certain transactions between Keene on the one hand and certain affiliated entities on the other that occurred during the 1980s. The affiliated entities are Keene's former parent, Bairnco Corporation ("Bairnco"), and five Bairnco wholly owned subsidiaries: Kaydon Corporation ("Kaydon"), The Genlyte Group ("Genlyte"), Kasco Corporation ("Kasco"), Shielding Systems Corporation ("Shielding"), and Arlon, Inc. ("Arlon"). In 1981, Bairnco was formed to serve as a holding company for all of Keene's common stock. Subsequent to Bairnco's formation, and during the ensuing years, Bairnco's subsidiaries were formed for the purpose of acquiring certain of Keene's assets. The transactions between Keene and the five Bairnco subsidiaries¹ were as follows:

                  Subsidiary  Keene Assets Acquired                      Purchase Price       Year
                  Kaydon      Industrial Bearings and Fittings Division  $65,000,000.00       1983
                  Genlyte     Lighting Division                          $52,500,000.00       1984
                  Kasco       Cutting Services Division                  $ 9,000,000.00       1986
                  Shielding   Electromagnetic and Shielding Divisions    $49,500,000.00       1987-88
                  Arlon       Laminate and Coded Products Division       $48,000,000.002 1989
                

Subsequent to some of the transactions, Bairnco spun off certain of these subsidiaries. At present, Kasco, Shielding and Arlon continue to be subsidiaries of Bairnco. Keene, Genlyte and Kaydon are no longer subsidiaries of Bairnco, although they may be owned in whole or in part by Bairnco's former shareholders.

Prior to bankruptcy, Keene's creditors attacked these transfers. According to Keene, approximately 1,600 such actions were commenced against the former Keene affiliates as well as former and present officers, directors and shareholders of Keene and the affiliates. These include class actions filed in the United States District Courts for the Southern and Eastern Districts of New York.

The Southern District case, entitled Coleman v. Bairnco Corporation, 93 Civ. 5593, and assigned to District Judge Patterson, was commenced on August 11, 1993. The defendants include the six affiliates and seven individuals who are present or former officers, directors or shareholders of Keene or the affiliates. The gravamen of the Coleman complaint, set forth in paragraph 38, is that:

In early 1981, therefore, Keene\'s management, under the direction of defendant Bailey Keene\'s President and Chairman, embarked upon a plan to defraud Keene\'s asbestos creditors by restructuring Keene so as to put its profitable operations and assets with growth potential into new companies that they would continue to control but which would be beyond the reach of Keene\'s asbestos creditors.

The Coleman complaint consists of eight "counts". The first two counts charge that the sale of Keene's assets to the five Bairnco subsidiaries constituted fraudulent conveyances under New York State law.³ The third count asserts successor liability "because each of the related transferees knew or had reason to know of Keene's asbestos liabilities at the time of these transfers, each of these defendants assumed the liabilities or otherwise acquired the transferred assets subject to the liabilities." (Coleman Complaint, ¶ 68). The fourth count asserts tort liability based on piercing the corporate veil because "Bairnco and the individual defendants exercised their domination and control of Keene and the other corporate defendants to denude and strip assets from Keene in violation of the New York Debtor and Creditor law, to transfer those assets to the other corporate defendants, and to enrich themselves at the expense of Keene's asbestos creditors." (Coleman Complaint, ¶ 72).

The fifth and sixth counts allege a second generation of fraudulent transfers. They attack the spinoff of the Kaydon and Genlyte stock to Bairnco's shareholders on the theory that because Bairnco and Keene are alter egos, Bairnco's transfer of its assets (the stock in Kaydon and Genlyte) were fraudulent as to the Keene/Bairnco creditors. Count seven alleges that the individual defendants breached their fiduciary duties to Keene, Bairnco and the asbestos creditors by "denuding and stripping Keene of its assets and its profit making and growth potential." (Coleman Complaint, ¶ 90). Finally, count eight charges a conspiracy among all defendants to "defraud and denude Keene and to strip and dismantle its assets, as well as its potential for future profits and growth, so as to impair the right of Keene's asbestos creditors to recover for their injuries." (Coleman Complaint, ¶ 95).

The case of Huffman v. Bairnco Corporation was filed in the United States District Court for the Eastern District of New York at approximately the same time, and is pending before District Judge Jack B. Weinstein. The allegations in the complaint are the same as Coleman. The complaint names the six former affiliates as defendants, as well as thirty-two individuals who were either former or present officers, directors or shareholders of Keene or the other six former affiliates. In language reminiscent of the Coleman case, the plaintiffs in this action, charged that:

In early 1981, therefore, Keene\'s management, under the direction of Bailey, embarked upon a plan to restructure Keene so as to put its profitable operations and assets with growth potential into new companies that they would control but which would be beyond the reach of Keene\'s asbestos creditors.

Huffman Complaint, ¶ 62.

The Huffman complaint consists of ten claims; the first five charge fraudulent conveyances under New York law. The sixth charges successor corporate liability; the seventh, tort liability based on piercing the corporate veil; the eighth, breach of the individual defendants' fiduciary duties to Keene and its asbestos creditors; and the ninth, liability for injuries on account of acts in furtherance of a conspiracy to defraud. The tenth claim charges a joint enterprise liability among the Corporate Defendants all of whom "participated in a joint enterprise with a common purpose to strip and dismantle Keene's assets, as well as its potential for future profits and growth, in order to impair the right of Keene's asbestos creditors to recover for their injuries." (Huffman Complaint, ¶ 117).

DISCUSSION

A. THE AUTOMATIC STAY

1. Introduction

A common theme runs through the Coleman and Huffman complaints. They allege that the class plaintiffs hold claims for asbestos related injuries against Keene, and that Keene's transfer of assets to affiliates, and the spinning off of the stock of certain of those affiliates, including Keene, to Bairnco's shareholders, have impeded and prevented these creditors from collecting damages from Keene. The class plaintiffs' objective is to expand the pool of assets available to satisfy their claims by imposing liability on the nondebtor Corporate Defendants and Individual Defendants.

Keene argues that the commencement or continuation of actions involving such claims is barred by the automatic stay, and even if it is not, that the Court should extend the automatic stay under 11 U.S.C. § 105(a). This Court has stated on a prior occasion that filing of the Keene petition triggered the broad protections of the automatic stay. See Keene v. Acstar Insurance Co., 162 B.R. at pp. 938-39. The stay is not limited to protecting the debtor or property of the estate, but also presents the "commencement or continuation . . . of a judicial, administrative or...