In re Laces, Case No. 97-43223(RDD) (Bankr. S.D.N.Y. 3/31/2009)
| Decision Date | 31 March 2009 |
| Docket Number | Case No. 97-43223(RDD).,Adv. Pro. No. 99-8600(RDD). |
| Parties | In re: M. SILVERMAN LACES, INC., Chapter 7, Debtor. ROBERT L. GELTZER, as Successor Chapter 7 Trustee, Plaintiff, v. HOWARD BLOOM, LEONARD EDELSON, ACHILLE GAETANO, ALL LACE PROCESSING CORPORATION f/k/a ALL LACE CORPORATION, and WESTCHESTER LACE CORPORATION, Defendants. |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York |
BRYAN CAVE LLP, by Robert A. Wolf, Esq. and Omar A. Shakoor, Esq., for Plaintiff.
FOX ROTHSCHILD LLP, by Daniel A. Schnapp, Esq. and Samantha H. Evans, Esq. for Defendants Leonard Edelson and Westchester Lace Corporation.
When the plaintiff (the "Trustee") was appointed successor trustee in this chapter 7 case in January 2004, he inherited this adversary proceeding, which commenced in September 1999. Leonard Edelson ("Edelson") and his wholly-owned corporation, Westchester Lace, Inc. ("WL," with Edelson, the "Defendants") are the only remaining defendants, the others having agreed to settlements. After lengthy negotiations failed, the Trustee and the Defendants went to a bench trial comprising testimony by five witnesses over three days, as well as an extensive documentary record. Thereafter, the parties submitted proposed findings of fact and conclusions of law. This memorandum sets forth the Court's findings of fact and conclusions of law underlying its determination that the Trustee has not proven his claims with the exception of certain claims that are, however, subject to a complete right of setoff.
The Trustee asserts various claims arising under chapter 5 of the Bankruptcy Code, 11 U.S.C. § 101 et seq., as well as breach of fiduciary duty. The Trustee claims that (i) WL obtained property of the debtor, M. Silverman Laces, Inc. ("SL" or the "Debtor") without paying for it or, alternatively by means of a setoff that is not sustainable under Bankruptcy Code section 553; (ii) WL obtained property of SL for less than reasonably equivalent value when SL was insolvent, had unreasonably small capital or SL intended or believed it would incur debts beyond its ability to pay when due and, therefore, WL received an avoidable fraudulent transfer under Bankruptcy Code sections 544(b) () and 548(a); and (iii) Edelson, a director and fifty percent shareholder of SL, breached his fiduciary duties to SL by wrongfully causing the diversion of the foregoing property to WL and effectively terminating SL's business, all to Edelson's advantage, and WL aided and abetted such breach.1
The Trustee seeks damages, an accounting and, where not duplicative, recovery of the value of the alleged fraudulently transferred property under Bankruptcy Code section 550, plus pre- and post-judgment interest.
WL counterclaims that the Debtor owed it a far larger amount on the chapter 7 petition date than any amount it might owe the Trustee. Although WL did not file a proof of claim for this debt, it contends that it is subject to setoff under Bankruptcy Code section 553 against any prepetition amounts owed SL.
This Court has jurisdiction over this adversary proceeding under 28 U.S.C. § 1334(b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(H), (K) and (O). Venue is proper under 28 U.S.C. § 1409(a).
On May 14, 1997, several creditors, but not WL, filed an involuntary chapter 7 petition against SL. The Court signed an order for relief on June 18, 1997, and the original chapter 7 trustee, Sarah Lichtenstein was appointed that day.
SL, a New Jersey Corporation, was a wholesaler and converter of lace goods. Tr.3, pp. 119-20;2 Declaration of Achille Gaetano, dated February 21, 2008 ("Gaetano Decl.") ¶ 4.3 It essentially was a middleman in the lace manufacturing process: it bought "greige goods" (undyed knitted goods), had third parties dye and finish them, and then sold the finished product to retailers and jobbers. Tr.3, pp. 101-03, 124-25; Gaetano Decl. ¶ 4. In addition to purchasing greige goods and seeing them through the finishing process, SL also bought finished lace products from third parties for resale. Gaetano Decl. ¶ 4. SL had a small number of proprietary designs for lace goods, and sometimes it had raw material finished according to these patterns. Geatano Decl. ¶ 5; Declaration of Leonard Edelson, dated February 21, 2008 ("Edelson Decl.") ¶ 23. Generally, however, SL had its greige goods finished according to "market patterns" bought from third parties. Tr.3, p. 102.
Faced with foreign competition, declining prices and rising costs, the U.S. lace industry fell on hard times in the mid-1990s; a number of SL's customers and competitors went out of business. Edelson Decl. ¶ 11; Gaetano Decl. ¶ 14; Tr.3, p. 102. SL had a net loss of approximately $2.4 million in 1995. Gaetano Decl. ¶ 14.
Defendant WL also was, and continues to be, engaged in the lace business, although on a broader scope than SL. WL knitted raw materials into greige goods, dyed and finished them from its own designs and sold the finished product to customers — that is, to retailers and jobbers, as well as to wholesalers and converters such as SL. Like SL, WL purchased greige goods from third parties, but, unlike SL, it dyed and finished them for resale to wholesalers, converters, retailers and jobbers. WL also contracted to dye and finish greige goods owned by third parties, such as SL, who would resell the finished product. Edelson Decl. ¶¶ 14, 19-20; Tr.3, pp. 137-38.
WL also experienced a downturn in its business in the mid 1990s. The number of its customers shrank, Tr., p. 163; Edelson Decl. ¶ 11, as did its net sales, declining from approximately $27.5 million in 1994 to approximately $25.7 million in 1995. Ex. P20A; Ex. P20B.4
From 1992 through 1995, SL had two shareholders, Achille Gaetano and Alvin Bloom. Recognizing SL's declining fortunes at the end of 1995, they decided to form an "alliance" with WL, with which SL had already been conducting some business. Tr., p. 62; Tr.3, pp. 101-02. In return for investing $50,000, on January 1, 1996, Edelson, thus became a fifty percent shareholder of SL, as well as a director. Edelson Decl. ¶ 26; Tr.3, p. 131. He remained the sole shareholder of WL. Ex. P2; Tr.3, p.131.
Although there was fairly extensive testimony regarding the scope of the "alliance," only one agreement exists governing the relationship: a one-page Requirements Agreement executed by the parties on May 17, 1996 but dated "as of January 1, 1996." Ex. D1. The Requirements Agreement states that SL shall give WL all of its "business relating to lace knitting and dying, provided that the prices charged by [WL] to [SL] are competitive with other knitters and dyers." WL agrees to accept the work and perform in accordance with the usual industry standards but not to increase its capacity in order to fill" such orders. SL is free to give orders to others if WL cannot or does not accept SL's business. Either party has the right to terminate the agreement if Edelson or any member of his family ceases to own a controlling interest in WL or ceases to be a stockholder of SL. Id. The Trustee does not assert a claim that WL breached this contract.
The two companies never merged. The Trustee has not alleged that there was a de facto merger, either, or that SL and WL became alter egos or that WL's corporate veil should be pierced in order to subject WL to SL's debts. SL and WL had different employees, books and records, computer systems, bank accounts and, until shortly before the involuntary chapter 7 petition, offices. Edelson Decl. ¶ 28; Tr.3, pp. 68-70, 95, 115.
Edelson's role in managing SL appears to have been limited. SL did not pay him a salary or other compensation. Gaetano and Bloom, who were salaried officers as well as shareholders, managed SL's day-to-day operations, including placing orders and sales. Edelson Decl. ¶ 27. Edelson was to focus on dying and finishing, id., in keeping with WL's role under the Requirements Agrement. By locking in WL as its source for dying and finishing, SL believed that it would improve the quality and delivery of its product. Id. ¶ 24; Gaetano Decl. ¶ 17; Tr.3 p. 102. There seems to have been a general sense that SL would also benefit from association in the industry with Edelson, an experienced operator, and with WL, a larger and financially stronger company than SL. Gaetano Decl. ¶ 17; Edelson Decl. ¶¶ 24-25; Tr.3, pp. 102, 161-63. The two companies also obtained ready access to each other's proprietary designs and the ability to sell goods cut according to those designs to their respective customers, Gaetano Decl. ¶ 28; Edelson Decl. ¶ 33, although the number and value of WL's proprietary designs greatly exceeded SL's. Tr.3, p. 19-21; Gaetano Decl. ¶ 5; Edelson Decl. ¶ 23.5 Both parties hoped that WL would gain a reliable and increasingly more successful customer in SL. Tr.3, pp. 123-24.
Probably none of the foregoing would have led the Trustee to raise a claim against the Defendants but for another aspect of the "alliance." Starting in 1996, SL and WL "pooled" their customers. More specifically, having instructed their salesmen to identify their customers, as well as pricing and sales volume information, Gaetano Decl. ¶ 29; Tr., pp. 79, 82, Gaetano, Bloom and Edelson allocated certain of the companies' respective customers to SL salespeople and certain to WL salespeople. Gaetano Decl. ¶ 29; Edelson Decl. ¶ 33; Tr.3, pp. 45-6.
The rationale for this decision was frankly non-competitive. Before the "alliance," SL and WL had competed by selling their goods to many of the same customers, often to both companies' detriment. As Gaetano testified, before the...
To continue reading
Request your trial