In re Kelton Motors Inc.

Decision Date26 September 1990
Docket NumberBankruptcy No. 89-00255,Adv. No. 89-0019.
Citation121 BR 166
CourtU.S. Bankruptcy Court — District of Vermont
PartiesIn re KELTON MOTORS INC., Debtor. G. GLINKA, Esq., Trustee, Plaintiff, v. DARTMOUTH BANKING COMPANY, United Savers Acceptance Corp., and McNamara Motors, Inc., Defendants.





J. McNally, III, Teachout, Brooks, Moore & McNally, Norwich, Vt., J. Bodoff, Kaye, Fialkow, Richmond & Rothstein, Boston, Mass., for United Sav. Acceptance Corp. (USAC), Dartmouth Banking Co. (Dartmouth) and McNamara Motors, Inc. (McNamara), (collectively defendants).

J. Meyers, Jerome I. Meyers, P.C., White River Junction, Vt., for Kelton Motors Inc. (Kelton Motors).

M. Palmer, Glinka & Palmer, Middlebury, Vt., D. Lynch, Miller, Cleary & Faigant, Ltd., for G. Glinka, Trustee and (Trustee).


CHARLES J. MARRO, Retired Bankruptcy Judge.


On November 6, 1989, Trustee filed an Amended Complaint1 for damages against Defendants on three counts: Count 1, "Bad Faith" under 11 U.S.C. § 303(i);2 Count II, "Equitable Subordination" under 11 U.S.C. § 510(c);3 and, Count III, violation of the "Automatic Stay" under 11 U.S.C. § 362(a)(1).4

Trustee's Count I for "Bad Faith" complains the filing of an involuntary petition by the Defendants was part of a conspiracy to undermine Kelton's pre-petition workout and to drive Kelton and others connected to Kelton out of business for Defendants' mutual benefit so McNamara, Kelton's competitor and one of the involuntary petitioners, could take over Kelton's auto and truck sales territory and coverup the faltering obligations from McNamara to USAC and Dartmouth. Additionally, Defendants tortiously interfered in Kelton's business relations by undermining Kelton's proposed sale of its trucking franchise to a third party that was related to Kelton. Defendants' actions resulted in the inability of Kelton to secure cash, credit, and caused Kelton to suffer drastic decline in sales, forcing Kelton to cease doing business and liquidate under Chapter 7, 11 U.S.C. §§ 101 et seq. Trustee also questions Defendants good faith in obtaining "three or more entities" under § 303(b)(1) when Defendants are interrelated, i.e., Dartmouth owns 1/3 of the capital stock of USAC and the primary stockholder and president of McNamara is also a director of Dartmouth. Trustee further complains McNamara did not qualify as one of the three entities under § 303(b)(1) because McNamara's claim of $39.64 was not overdue and represented a current balance on account at the time of the filing of the involuntary petition, and this fact could and should have been ascertained by Defendants and would have spared Kelton from the fall-out of the stigma of the bankruptcy. Trustee cites Defendants' interrelatedness as further evidence of their conspiracy to put Kelton and its principals out of business. Trustee challenges Defendants' good faith in the filing of the involuntary petition when simultaneously with the filing the involuntary petition against Kelton, Defendants also brought post-petition State Court actions against Kelton, Kelton's principles and others related to Kelton. Trustee says such concerted actions were in furtherance of Defendants' design to force Kelton to liquidate.

Trustee's Count II Equitable Subordination under 11 U.S.C. § 510(c) reiterates Count I's averments and adds Defendant USAC and Defendant Dartmouth represented in their involuntary petition that they held certain retail installment contracts from Kelton with recourse which were in default. Trustee alleged that USAC's president ignored the credit line limit imposed by USAC on Kelton and extended credit in excess of the authorized lending limits. Trustee says this is further evidence of Defendants' concerted action to drive Kelton out of business. Moreover, Trustee says USAC is responsible for its own loss because USAC's president encouraged the over-extension of credit. USAC and Dartmouth failed to act prudently to protect their respective interests by not supervising, inspecting or otherwise performing the necessary functions of a prudent floor plan financier. USAC and Dartmouth also failed to take any corrective action to prevent USAC's president from making unauthorized loans in excess of his credit limit authority. We gather from Trustee's complaint that Defendants' action in over extending credit is an evidentiary example of inter alia, Defendants' conspiracy to put Kelton and its related entities and principles out of business. Thus, Defendants engaged in inequitable conduct that encouraged Kelton to over-extend itself, conferred an unfair advantage on Defendants and resulted in the destruction and liquidation of Kelton's business to the injury of Kelton and Kelton's creditors.

Trustee's Count III Automatic Stay violation under 11 U.S.C. § 362(a)(1) reiterates the averments from Counts I and II and adds that after the filing of the involuntary petition against Kelton, USAC filed a State Court civil action against Kelton and others related to Kelton in violation of § 362. Trustee also says this is further evidence of Defendants putting Kelton and others related to Kelton out of business. Additionally, USAC deposed Carl E. Kelton, Sr., Shirley Kelton, Rose Temple, employees and others that are integral to Kelton without seeking relief from stay. Trustee also says the depositions were contrary to our Bench Order that no depositions or discovery were to be taken of Kelton and others related to Kelton before Kelton's 11 U.S.C. § 341 first meeting of creditors.

A. Defendants' Motion to Dismiss.

Defendants moved for a pre-answer dismissal of Trustee's Amended Complaint and submitted a "Memorandum of Law in Support of Motion of Defendants to Dismiss the Trustee's Amended Complaint." Defendants' Motion to Dismiss characterizes Trustee's Amended Complaint as nothing more than an reiteration of an original amended complaint by Kelton Motor's DIP's attorney which, in turn, was merely at Mr Kelton's direction in retaliation to Defendants' State Court litigation against Mr. Kelton, his friends and relatives.

Defendants attack Trustee's Bad Faith Count on three grounds.

First, Defendants claim it is not a core matter and, absent their consent, we lack subject matter jurisdiction over Trustee's Bad Faith count because it is "only tangentially related to matters concerning the administration of the estate." Moreover, Defendants say it is not core because Trustee's Bad Faith action really belongs in State Court because it consists of state causes of action including "twenty allegations mixing tortious interference, conspiracy, bad faith conduct and other non-identifiable causes of action."

Second, Defendants request a dismissal of Trustee's Bad Faith action on the ground that it fails to state a cause of action upon which relief can be granted.5 Specifically, Defendants advance that before there can be money damages against them for a bad faith filing of an involuntary petition, the involuntary petition must be dismissed under 11 U.S.C. § 303(i) and Rules of Practice and Procedure in Bankruptcy Rule 1011.6 In the instant case, there was no such dismissal of the involuntary petition, thus, Trustee's Bad Faith count fails for want of a condition precedent of a dismissal. Moreover says Defendants, Kelton waived any right to seek monetary damages for the alleged bad faith filing of the involuntary petition because it consented to the entry of an order for relief by the voluntary Chapter 11 filing.

Defendants' third ground for dismissal of Trustee's Bad Faith action is based on Rules of Practice and Procedure in Bankruptcy Rule 7009.7 Although Trustee does not use the term fraud in Count I, Defendants' characterize Count I as an unexpressed action for fraud because it uses terms such as "schemes," "conceal," "conspired," "tortiously interfered," "bad faith," and, "malicious intent." Defendants conclude that because Trustee failed to "spell out" the criteria necessary to properly plead "tortious interference" or "fraudulent conspiracy," then Trustee's Bad Faith action fails Rule 9's specificity requirements and, in turn, must be dismissed under Rule 12(b)(6).

Defendants seek a dismissal of Trustee's Count II for Equitable Subordination on the grounds it too fails to state a claim upon which relief may granted under Rule 12(b)(6). Specifically, Defendants say Trustee's allegations, at best, state that Defendants were merely negligent in their supervision and inspection of Kelton's inventory and finances, whereas equitable subordination requires allegation of fraud, illegality or a breach of fiduciary duty.

Defendants seek a dismissal of Trustee's Count III for violation of the Automatic Stay on the grounds it also fails to state a claim upon which relief may granted under Rule 12(b)(6). Factually, Defendants admit the Trustee's allegation that Kelton was a named defendant in the post-petition State Court action, however, Defendants advance the State Court filing was harmless in that they "have not proceeded against Kelton beyond the mere filing of a Complaint." Defendants also admit the State Court litigation names relatives, agents and friends of Kelton as defendants. Defendants further admit they have conducted post-petition State Court depositions of Kelton's officers and agents. Nevertheless, Defendants say they may continue their State Court action against such defendants and conduct any depositions of any entity or party that is not a bankruptcy debtor, because § 362's automatic stay applies only to Kelton and not to nonbankruptcy debtors/defendants.

B. Trustee's Opposition to Defendants' Motion to Dismiss.

In anticipation of Defendants' Motion to Dismiss Trustee's Amended Complaint, Trustee filed a "Preliminary Memorandum in Opposition...

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