In re Lois/USA, Inc., Bankruptcy No. 99 B 45910(REG)
Decision Date | 15 May 2001 |
Docket Number | 99 B 11026,Bankruptcy No. 99 B 45910(REG),99 B 11025. Adversary No. 00-2350. |
Parties | In re LOIS/USA, INC., Lois/USA New York, Inc. Lois/USA Chicago, Inc. Debtors. The Official Committee of Unsecured Creditors of Lois/Usa, Inc Lois/USA New York, Inc., Lois/USA Chicago, Inc., Plaintiff, v. Conseco Finance Servicing Corp. f/k/a Green Tree Financial Corp., and General Electric Capital Corporation Defendants. |
Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York |
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Pryor Cashman Sherman & Flynn LLP, By Carole Neville, Esq. and Holly S. Falkowitz, Esq., New York City, for Plaintiff Official Committee of Unsecured Creditors.
Togut Segal & Segal LLP, By Frank A. Oswald, Esq., New York City, for Debtor.
Latham & Watkins, Chicago, IL, By James A. Cherney, Esq., By Roland Young, Esq., New York City, for Defendant Conseco Finance Servicing Corporation, f/k/a Green Tree Financial Corporation.
Gibson Dunn & Crutcher LLP, By Mitchell A. Karlan, Esq. and Rebecca Sanhueza, Esq., New York City, for Defendant General Electric Capital Corp.
In this adversary proceeding — a "lender liability" action — the Official Committee of Unsecured Creditors (the "Committee") in the chapter 11 cases of the debtor advertising agencies Lois/USA, Inc. ("Lois/ USA"); Lois/USA New York, Inc. ("Lois/ NY") and Lois/USA Chicago, Inc. ("Lois/Chicago," and collectively, "Lois") seeks recovery, on behalf of the Lois estate, of not less than $45 million from the debtors' former secured lenders, defendants Green Tree Financial Corp. ("Green Tree")1 and General Electric Credit Corporation ("GECC," and together with Green Tree, the "Lenders"), and seeks equitable subordination of the Lenders' claims.
In June 1999, Lois closed on a secured credit facility provided by the Lenders, for a maximum extension of credit of $30 million (but which, as a practical matter, would result in a considerably lesser amount being disbursed, by reason of borrowing base restrictions), replacing a $25 million maximum facility that had been provided by Sanwa Business Credit Corporation ("Sanwa"). The Lenders' facility was documented, in part, by a 111-page Loan and Security Agreement, dated as of June 17, 1999 (the "Agreement"). The Committee alleges, among other things, that before the Agreement was signed, Green Tree made promises and representations to Lois with respect to the facility that ultimately became the subject of the Agreement, including representations as to the size of the facility that would be provided; the time by which the financing would be made available; and the amounts that could be drawn down under its borrowing base formulas. These promises, the Committee alleges, after having been relied on to its detriment by Lois, were not kept, and representations made by Green Tree with respect to the prospective financing were fraudulently (or, alternatively, negligently) made.
GECC, as alleged by the Committee, is bound by the acts of Green Tree, which, after the closing of the loan, was agent for the facility. Also, the Committee alleges that the Lenders declared a nonpayment default under the new facility within approximately three months of closing on it, raising alleged questions as to their intention ever to perform under it, good faith in performance, or both. The Committee also has argued in its briefs (though significant portions of this were not so alleged in the Complaint) that the Lenders engaged in a variety of post-closing acts with the purpose or effect of exercising control over Lois' operations for their own benefit — including, perhaps most significantly, directing that unsecured creditors not be paid at the same time that the Lenders' own loans were being paid down.
Based on those and other matters, the Committee asserts nine causes of action, including damage claims sounding or arguably sounding in contract, equity, fraud and other torts, and breach of fiduciary duty, in addition to the request for equitable subordination. But relying in substantial part on an Illinois statute that they assert protects them from claims of this nature,2 Illinois common law (which they contend is applicable to all claims other than the claim for equitable subordination), and New York law — which they contend supports dismissal even if Illinois law does not apply — the Lenders have moved to dismiss all nine causes of action for failure to state a claim upon which relief can be granted.3 The Lenders also seek dismissal of the fraud claims for failure to state the circumstances constituting the alleged fraud with the requisite particularity.4
The matter was extensively briefed and argued.5 The motions are granted in part and denied in part,6 under the choice-oflaw principles, and for the reasons, set forth more fully below.
(Agreement ¶ 10.7). The Agreement did not provide, however, that any and all disputes with respect to the parties' dealings (or any analogous broader formulation of the scope of the parties' choice-of-law agreement) would be governed by Illinois law.
With this as context, there are vigorously disputed issues of conflicts of law, particularly with respect to claims that do not require construction of (or are otherwise affected by) the parties' contract, along with the consideration of the underlying substantive law after the Court determines the state(s) whose law provides the rule of decision. Issues debated by the parties, in this connection, include, among others, whether:
For the reasons described below, the Court concludes:
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