In re Landmark Distributors, Inc.
| Decision Date | 16 November 1995 |
| Docket Number | Bankruptcy No. 94-20456. |
| Citation | 189 BR 290 |
| Parties | In re LANDMARK DISTRIBUTORS, INC., Alleged Debtor. |
| Court | U.S. Bankruptcy Court — District of New Jersey |
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Kaye, Scholer, Fierman, Hays & Handle by Herbert S. Edelman, Jane W. Parver, Jay G. Strum, Michael Lynn, New York City, Frankel and Abrams by Sandor Frankel, New York City, for Alleged Debtor Landmark Distributors, Inc.
DeMaria, Ellis, Hunt, Salsberg & Friedman by William J. Hunt, Lee H. Udelsman, Paul Friedman, Joseph D. Olivieri, Newark, NJ, for Tommy Boy Music, Inc.
Paul, Hastings, Janofsky & Walker by George L. Graff, James W. Kennedy, New York City, for Tommy Boy Music, Inc., Select Records and Luke Records.
Winick & Rich by Jeffrey N. Rich, Robert N. Michaelson, New York City, for Max Entertainment, Inc.
Davis, Scott, Weber & Edwards by David Dunn, Jay Gerber, New York City, for Various Non-Party Warner Entities.
Reid & Priest by Richard P. Swanson, New York City, for Cory Robbins.
The within matter comes before the court pursuant to 11 United States Code Section 303(i) wherein alleged debtor Landmark Distributors, Inc. ("Landmark") seeks to have the court grant judgment awarding Landmark costs and reasonable attorneys fees; in addition, Landmark seeks damages proximately caused by the filing of an involuntary bankruptcy proceeding, as well as punitive damages. Issues under Bankruptcy Code Section 303 going to the awarding of damages in the context of a dismissed involuntary proceeding are core matters as defined by the federal Congress in 28 United States Code Section 157.
On January 25, 1994, three creditors filed an involuntary bankruptcy petition against Landmark Distributors, Inc. ("Landmark"). Landmark filed an answer to the involuntary complaint and issue was joined.
For four days, commencing March 15, 1994, the bankruptcy court tried the issue of the filing of the involuntary complaint and whether the alleged debtor, Landmark, should be placed in a chapter 7 bankruptcy proceeding. At the conclusion of the four-day trial, the court issued an oral bench opinion on March 24, 1994, setting forth the court's findings. In summary, the court found that the involuntary petition should be dismissed. During the four-day trial, the court had the benefit of hearing the testimony of eight witnesses and reviewing exhibits placed in evidence. The parties have stipulated herein that the initial record of the proceedings in March of 1994 is incorporated into the matter sub judice on the trial of damages. The parties have further conceded that the oral opinion of this court rendered on March 24, 1994, and memorialized in a transcript filed April 5, 1994, are specific findings made by the trier of fact and also constitute the law of the case.
At the conclusion of the March 1994 trial, an appeal was duly taken to the district court. In a letter opinion of September 30, 1994, District Court Judge Nicholas Politan affirmed the findings of the bankruptcy court dismissing the involuntary petition against Landmark.
On January 25, 1994, Landmark Distributors, Inc. was a corporation engaged in the distribution of records. Its business consisted of purchasing records from record manufacturing companies and, in turn, distributing those records to retail outlets throughout the United States.1
The three petitioning creditors who originally filed the bankruptcy matter on January 25, 1994, consisted of Max Entertainment Inc. ("Max"), who asserted a claim against the alleged debtor of $26,113. The second petitioning creditor was Select Records ("Select") who asserted a claim originally in the amount of $121,694; however, said claim was ultimately reduced in the context of the March 1994 trial to the sum of $106,000. Tommy Boy Music, Inc. ("Tommy Boy"), the third petitioning creditor,2 asserted that it was owed a balance of $263,463 by Landmark Distributors, Inc.3 All the petitioning creditors were in the record manufacturing business.
After listening to the testimony of eight witnesses at the original trial in March of 1994, the court found and ruled that there were extensive negotiations underway between Tommy Boy, one of the petitioning creditors, and Profile Records, a related entity to Landmark. The negotiations between Tommy Boy and Profile were aimed toward Tommy Boy acquiring the assets of Profile. The court expressly noted on page 7 of the March 24, 1994, transcript that the negotiations had commenced sometime in August of 1993, and that the negotiations took a more serious turn over the Labor Day weekend of September 1993.
At the conclusion of the first trial, the court noted that, with the exception of Landmark's agreement with Luke, each of the relationships between the petitioning creditors and Landmark was pursuant to an oral distribution agreement. The court also found that, although most of the petitioners' invoices specified that payment was due within 60 days, the industry had tolerated payments beyond the mere invoice date so long as normal monthly payments were being made.4
The court previously found that it was the nature of Landmark's business that it generally purchased records from manufacturers in the music industry. It is noted that Landmark's principal vendor was its related corporation known as Profile Records. The parties are also all in agreement that the primary area of the music industry serviced by Landmark was "niche music," catering to aficionados of rap music as well as dance music. In general, Landmark would purchase its records from the manufacturer.5 After acquiring records, a distributor's task through sales personnel would be to sell the inventory or distribute same throughout the retail market place. Landmark has testified that it had a sales staff that would make calls on music chain stores as well as on small so-called "Mom-and-Pop" record outlets. Witnesses for both the petitioning creditors and the alleged debtor also agreed that it was a general policy in the record industry to allow a retail outlet to return unsold records to the distributor; the distributor, in turn, was customarily allowed to return recordings to the original manufacturer. There was a dispute at the original trial as to whether a distributor, such as Landmark, was entitled to automatically return records to the manufacturer for credit or whether a distributor was required to wait for return authorization. However, the distinction is immaterial for purposes of this damage hearing.
The court, in its opinion at the conclusion of the initial trial, also expressly found that when a relationship between a record manufacturer and a distributor is terminated, the record manufacturer may appoint a new distributor to whom the retail sellers of the music may return their records. As a result of this rather elaborate process, the court expressly found that there is a customary and commercially reasonable six-month "reconciliation period" which follows the termination of a relationship between a distributor, such as Landmark, and a record manufacturing corporation. During the reconciliation period, the parties adjust the monies owed by the distributor to the manufacturer to take into consideration return records.
In analyzing the claims of the petitioning creditors at the conclusion of the first hearing, the court concluded that the Max claim was in litigation, which had been pending for some period of time in the State of New York, and that there was a legitimate dispute as to whether sums were owed by Landmark to Max. In connection with the Select claim, the court concluded that the termination by Select of its relationship with Landmark in December of 1993, triggered the commencement of a reconciliation period. Based on the commercially reasonable standard found by the court, the court concluded that Select's joining of the involuntary petition in January of 1994, one month after the termination of the relationship between Landmark and Select, was insufficient time for a reconciliation, and this allowed Landmark to say there was a dispute as to the amount owed and return credits to which Landmark was entitled.
Luke, the fourth petitioning creditor, having joined the proceeding after the filing of the original involuntary petition, had originally entered into a written distribution agreement with Landmark in July of 1992. The relationship between Luke and Landmark terminated in 1992 and resulted in Landmark filing suit against Luke in the State of New York alleging breach of the distribution agreement. In the context of that litigation in the State of New York prior to the bankruptcy filing, Luke had filed a counterclaim alleging that approximately $195,661 was owed by Landmark to Luke. At the conclusion of the first hearing, the court found that there was a legitimate business dispute in litigation prior to bankruptcy between Luke and Landmark.
Tommy Boy Music, Inc., the largest of the original petitioning creditors, asserted a claim of $263,463 against Landmark. Landmark admitted owing Tommy Boy the asserted sum for records purchased during the distribution agreement between Tommy Boy and Landmark which ultimately was terminated in December of 1992. It is noted that in May of 1993, the parties agreed that the Landmark/Tommy Boy account was reconciled and the parties settled on an amount due. The amount of this sum was $493,000 as of May 1993.6 The parties then agreed upon a repayment schedule which would allow Landmark to pay its obligation to Tommy Boy in installments. The agreement reflected that an $80,000 payment would be made in June 1993. It is not disputed that said payment was made. (Exhibit P-114.) Peter Takiff, chief financial officer for Tommy Boy, testified on March 16, 1994, that after the entry of the repayment agreement between Landmark and Tommy Boy, Landmark did pay the $80,000 initial...
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...conduct by a petitioning creditor bears on that determination. For example, as noted by Apollo's counsel, in In re Landmark Distributers, Inc., 189 B.R. 290 (Bankr. D.N.J. 1995) Judge Tuohey identified post-filing conduct by the petitioning creditors that constituted badges of bad faith. In......