In re Ltd.

• Decision Date: 21 April 2011
• Docket Number: Adversary No. 09–8266 (RDD).,Bankruptcy No. 08–23660 (RDD).
• Citation: 450 B.R. 414
• Parties: In re MacMENAMIN'S GRILL LTD., Debtor.Robert L. Geltzer, as Chapter 11 Trustee for MacMenamin' S Grill Ltd., Plaintiff,v.James F. Mooney, Mark Hantho, Neil Clark and TD Bank, N.A., Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

450 B.R. 414

In re MacMENAMIN'S GRILL LTD., Debtor.Robert L. Geltzer, as Chapter 11 Trustee for MacMenamin' S Grill Ltd., Plaintiff,

v.James F. Mooney, Mark Hantho, Neil Clark and TD Bank, N.A., Defendants.

Bankruptcy No. 08–23660 (RDD).

Adversary No. 09–8266 (RDD).

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

April 21, 2011.

Squire, Sanders & Dempsey LLP, by Robert A. Wolf, Esq. and Peter A. Zisser, Esq., New York, NY, for Robert L. Geltzer, as chapter 11 Trustee of MacMenamin's Grill Ltd.Todtman, Nachamie, Spizz & Johns, P.C., by Alex Spizz, Esq., New York, NY, for James F. Mooney, Mark Hantho and Neil Clark.

Ostrowitz & Ostrowitz, by Alan R. Ostrowitz, Esq., Manalapan, NJ, and Jennifer Marcus, Esq., for TD Bank, N.A.

MEMORANDUM OF DECISION ON DEFENDANTS' MOTIONS FOR SUMMARY JUDGMENT

ROBERT D. DRAIN, Bankruptcy Judge.

The chapter 11 trustee (the “Trustee”) of the above debtor (the “Debtor”) has filed a complaint seeking, under section 548(a)(1)(B) of the Bankruptcy Code, 11 U.S.C. § 101 et seq., as well as under section 544(b) of the Bankruptcy Code to the extent that it incorporates sections 273, 275 and 278 of the New York Debtor and Creditor Law, to avoid allegedly fraudulent transfers of the Debtor's cash to purchase the stock in the Debtor formerly owned by the three individual defendants (the “Shareholders”), as well as the loan from TD Bank, N.A. (and related security interest), the proceeds of which were used by the Debtor to fund the stock purchase, and to recover the transfers or the value thereof under section 550 of the Bankruptcy Code. The Trustee has sought to avoid the stock purchases and the TD Bank, N.A. loan and security interest only as constructively fraudulent; he has not asserted that the Debtor's purchases of the Shareholders' stock and the loan incurred by the Debtor to pay for the purchase and the related security interest in substantially all of the Debtor's assets were intentionally fraudulent.

The Shareholders and TD Bank, N.A. each moved for summary judgment under Fed. R. Bankr.P. 7056, which incorporates Fed.R.Civ.P. 56, on the basis that section 546(e) of the Bankruptcy Code bars the Trustee's avoidance claims and moots the application of section 550, which applies as a remedy only for avoidable transfers.¹

This memorandum explains the Court's basis for denying both motions.

Jurisdiction

The Court has jurisdiction over this proceeding, arising under sections 544 and 548 of the Bankruptcy Code, pursuant to 28 U.S.C. § 1334(b) and 28 U.S.C. § 157(a). This is a core proceeding under 28 U.S.C. § 157(b)(2)(H).

Standard on Summary Judgment

Under Fed.R.Civ.P. 56(a) the Court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and it is entitled to judgment as a matter of law. Subject to Fed.R.Civ.P. 56(c)(2)-(4) and 56(d)-(e), a party asserting that a fact cannot be, or is, genuinely disputed must support the assertion by (a) citing to particular parts of the record, including depositions, documents, electronically stored information, affidavits, or declarations, stipulations (including those made only for purposes of the motion), admissions, interrogatory answers, or other materials, or (b) by showing that the record does not establish the absence, or presence, as the case may be, of a genuine dispute. Fed.R.Civ.P. 56(c)(1). The movant bears the initial burden to satisfy each material element of its claim or defense. Vt. Teddy Bear Co. v. 1–800 BEARGRAM Co., 373 F.3d 241, 244 (2d Cir.2004); Isaac v. City of New York, 701 F.Supp.2d 477, 485 (S.D.N.Y.2010), aff'd 271 Fed.Appx. 60 (2d Cir.2008). Upon such a showing, the nonmoving party must provide evidence of a genuine issue of material fact to successfully oppose the motion. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). Facts are material if they “might affect the outcome of the suit under the governing law.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

The Court “is not to weigh the evidence but is instead required to view the evidence in the light most favorable to the party opposing summary judgment, to draw all reasonable inferences in favor of that party, and to eschew credibility assessments.” Amnesty Am. v. Town of W. Hartford, 361 F.3d 113, 122 (2d Cir.2004). A summary judgment motion may not be defeated by conclusory or self-serving statements, by simply raising metaphysical doubts about a material fact or by identifying immaterial disputed facts, Anderson v. Liberty Lobby, 477 U.S. at 247–48, 106 S.Ct. 2505; Matsushita Elec., 475 U.S. at 586, 106 S.Ct. 1348, although “if there is any evidence in the record from any source from which a reasonable inference in the non-moving party's favor may be drawn, the moving party simply cannot obtain a summary judgment.” Binder & Binder PC v. Barnhart, 481 F.3d 141, 148 (2d Cir.2007). See generally Matsushita Elec., 475 U.S. at 586, 106 S.Ct. 1348.

Of course, where the parties do not dispute the material facts, disagreeing instead on the outcome based on the applicable law, the matter is appropriate for summary judgment. Adirondack Transit Lines, Inc. v. United Transp. Union, 305 F.3d 82, 84 (2d Cir.2002).

Facts

The parties agree on the relevant material facts. Until August 31, 2007, the Shareholders each owned 31 percent of the issued and outstanding common stock of the Debtor, a bar and grill. On July 6, 2007 they entered into a Stock Purchase Agreement with the Debtor under which they agreed to sell their stock to the Debtor—a classic LBO, although writ small.² To fund the stock sale, the Debtor entered into a Loan and Security Agreement with Commerce Bank, N.A. (the “Lender”) ³ under which the Lender agreed to loan the Debtor $1,150,000. The loan was a Small Business Administration guaranteed loan, and attached to the SBA Settlement Sheet, dated August 31, 2007 and executed by representatives of the Lender and the Debtor, was a schedule of how the Lender was to make the loan payments: with the exception of fees, the loan proceeds were to be paid $390,000 to defendant Clark “to purchase stock,” $334, 983.07 to defendant Mooney “to purchase stock,” and $390,000 to defendant Hantho “to purchase stock.”

The closing of the Loan and Security Agreement and of the Amended Stock Purchase Agreement took place on August 31, 2007, with the foregoing payments being made to the Shareholders from the loan proceeds by the Lender, not the Debtor. The Lender wire transferred Mr. Clark's payment into his account at JPMorgan Chase, Mr. Mooney's payment into his account at U.S. Alliance Federal Credit Union, and Mr. Hantho's payment into his account at JPMorgan Chase. These were the only payments received by the Shareholders for the contemporaneous sale of their stock to the Debtor. At the same time, the Debtor secured the loan by granting the Lender a security interest in substantially all of its assets.

For purposes of the present motions, the parties agree that the Debtor did not receive fair consideration or reasonably equivalent value for the payments to the Shareholders or for the incurrence of the loan and the grant of the security interest to the Lender. The parties also have stipulated for purposes of the motion that on August 31, 2007 the Debtor was insolvent or became insolvent as a result of incurring the loan obligation and using the proceeds to purchase the Shareholders' stock. The Debtor filed its chapter 11 petition on November 18, 2008 (the “Petition Date”), and the Trustee commenced this adversary proceeding within the limitations period set forth in section 546(a)(1) of the Bankruptcy Code.

Discussion

The Shareholders' Summary Judgment Motion. The Shareholders acknowledge that under the foregoing facts the Debtor's purchase of their stock would be an avoidable constructive fraudulent transfer under both section 544(a) of the Bankruptcy Code (incorporating New York Debtor and Creditor Law sections 273, 275 and 278) and section 548(a)(1)(B) of the Bankruptcy Code but for the application of section 546(e) of the Bankruptcy Code. They contend that section 546(e)'s safe harbor applies to them, while the Trustee argues that it does not.

Section 546(e) of the Bankruptcy Code, states,

Notwithstanding sections 544, 545, 547, 548(a)(1)(B), and 548(b) of this title, the trustee may not avoid a transfer that is a margin payment, as defined in section 101, 741 or 761 of this title, or settlement payment as defined in section 101 or 741 of this title, made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency, or that is a transfer made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency, in connection with a securities contract, as defined in section 741(7), commodity contract, as defined in section 761(4), or forward contract, that is made before the commencement of the case, except under section 548(a)(1)(A) of this title.

11 U.S.C. § 546(e) (emphasis added).⁴

Section 741(8) of the Bankruptcy Code defines a “settlement payment” as a preliminary settlement payment, a partial settlement payment, an interim settlement payment, a settlement payment on account, a final settlement payment, or any other similar payment commonly used in the securities trade.11 U.S.C. § 741(8). Section 101(22) defines a “financial institution” as, among other things, “an entity that is a commercial or savings bank [or a] federally-insured credit union.” 11 U.S.C. § 101(22)(A). Section 741(7) of the Bankruptcy Code defines a “securities contract” as, among other things, “a contract for the purchase ... of a security,” 11 U.S.C. § 741(7)(A)(i), and the Bankruptcy Code defines a “security” to include “stock,”...