In re M. Paolella & Sons, Inc.
| Decision Date | 18 November 1993 |
| Docket Number | 92-1532. Bankruptcy No. 86-00495F. Adv. No. 88-0232F,87-1007F.,Civ. A. No. 92-1405 |
| Parties | In re M. PAOLELLA & SONS, INC., Debtor. Larry WASLOW, Trustee, Plaintiff, v. MNC COMMERCIAL CORP. and Maryland National Bank, Defendants. The AMERICAN CIGAR COMPANY, et al., Plaintiffs, v. MNC COMMERCIAL CORP., Maryland National Bank and Larry Waslow, Trustee, Defendants. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
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Arthur Newbold, Dechert, Price & Rhoads, Philadelphia, PA, for American Cigar Co., American Tobacco Co., Lorillard, Inc., Philip Morris, Inc. and R.J. Reynolds Tobacco Co.
William H. Ewing, Albert Bixler, Hangley, Connolly, Epstein, Chicco, Foxman & Ewing, Philadelphia, PA, for Larry Waslow, Trustee for M. Paolella & Sons, Inc.
Richard M. Jordan, White and Williams, Philadelphia, PA, for MNC Credit Corp.
This is an appeal from the Bankruptcy Court's Final Judgment entered on February 3, 1992. The debtor's secured creditor, MNC Commercial Corp. ("MNC"), filed timely notice of appeal from this final judgment; this appeal was docketed as Civil Action No. 92-1405. MNC appeals the equitable subordination of its claim and the judgments as to reclamation entered against MNC and in favor of American Cigar Company, American Tobacco Company, Lorillard, Inc., Philip Morris, Inc., and R.J. Reynolds Tobacco Company (collectively referred to as "the tobacco company plaintiffs"). The Bankruptcy Court concluded that the tobacco company plaintiffs should be entitled to recover, under equitable subordination, the following amounts: American Tobacco — $59,387.47; Lorillard — $374,636.00; Philip Morris — $820,700.51; and R.J. Reynolds — $681,585.70. The Bankruptcy Judge also determined, however, that to award judgments in the same amount on both equitable subordination and reclamation would be to compensate the plaintiffs twice for the same harm. Therefore, the Bankruptcy Judge concluded that the legal remedy should precede equitable relief. That is, the Bankruptcy Judge concluded that the tobacco companies were entitled to judgments on their reclamation claims and, if the equitable subordination award exceeded the judgment as to reclamation, the plaintiff could then recover the difference in equitable subordination. Thus, the Bankruptcy Court entered judgments against MNC and for the tobacco company plaintiffs on their reclamation claims as follows: American Tobacco — $59,387.47; Lorillard — $374,636.00; Philip Morris — $619,589.40; and R.J. Reynolds — $537,764.80. The Bankruptcy Court determined that, as to R.J. Reynolds and Philip Morris, the judgments as to equitable subordination exceeded the judgments awarded as to their reclamation claims. Therefore, the Bankruptcy Court entered judgments for these two plaintiffs as to their equitable subordination claims in excess of the reclamation claims as follows: Philip Morris — $201,111.11; and R.J. Reynolds — $143,820.90.
The trustee in bankruptcy, Larry Waslow, also filed timely notice of appeal as to the Bankruptcy Court's final judgment against MNC and in favor of the trustee in the amount of $166,103. The trustee's appeal was docketed as Civil Action No. 92-1532. The trustee contends that the judgment in his favor should have been $2,655,488.
This Court has jurisdiction to hear these consolidated appeals, 92-1405 and 92-1532, pursuant to 28 U.S.C. § 158.
The district court's review of questions of law in a bankruptcy appeal is plenary. Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98 (3d Cir.1981). However, findings of fact of the bankruptcy court will not be set aside unless "clearly erroneous." Bankruptcy R. 8013; Decatur Contracting v. Belin, Belin & Naddeo, 898 F.2d 339 (3d Cir.1990). "A finding is `clearly erroneous' when, although there is evidence to support it, the reviewing court is left with the definite and firm conviction that a mistake has been committed." U.S. v. U.S. Gypsum Co., 333 U.S. 364, 393-94, 68 S.Ct. 525, 541, 92 L.Ed. 746 (1948). Upon a determination that the Bankruptcy Court's factual findings are not clearly erroneous, the district court must examine whether the factual findings are legally sufficient to support the bankruptcy court's conclusions of law. See Universal Minerals, 669 F.2d at 102.
Since this Court has determined that the findings made by the Bankruptcy Court are not "clearly erroneous," we summarize the relevant facts as found by the Bankruptcy Judge as follows:
The debtor, M. Paolella & Sons, Inc., was the largest wholesale distributor of tobacco products in the Delaware Valley. On January 26, 1982, the debtor and MNC entered into a financing agreement that provided a line of credit secured by virtually all of the debtor's assets, i.e., receivables, inventory, and equipment. These security interests were perfected by filings pursuant to the Uniform Commercial Code ("UCC"). Initially of two-year duration, the agreement was renewed and was in effect up to January 26, 1986. The financing agreement was asset-based in that it provided the debtor with a line of credit determined by a formula whereby the debtor could borrow against 85% of eligible accounts receivable and 60% of eligible inventory.
In October 1982, the debtor requested and MNC permitted an increase in credit to enable the debtor to participate in a special buying program offered by the tobacco companies. Thereafter, the debtor's loan was always out of formula. That is, after October 1982, the amount advanced by MNC always exceeded the sum of 85% of eligible receivables plus 60% of eligible inventory. Although MNC attempted repeatedly to bring the loan within formula, MNC agreed on several occasions to increase the amount of the overadvance to enable the debtor to participate in the tobacco companies' special buying programs; the debtor participated in these programs regularly.
As a consequence of the loan being out of formula, MNC, pursuant to the financing agreement, exercised considerable control of the debtor's business operations. Each business day the debtor would submit a report disclosing daily information as to receivables and weekly data as to the inventory. In addition, the debtor submitted weekly reports denoting invoices received. The financing agreement also gave MNC reasonable access to the debtor's premises during regular business hours and at other reasonable times, in order to conduct audits of its collateral. Pursuant to the agreement, MNC conducted frequent audits of the debtor's operations. MNC used all of this information to calculate the value of its collateral, the daily loan balance, and the additional loan sums then available to the debtor. All of these computations also included information from the debtor's tobacco distributor subsidiaries, Jersey Coast Tobacco & Candy ("Jersey Coast") and William B. Merrey and Sons, Inc. ("Merrey"). Typically, Michael Paolella, the debtor's president, or another Paolella employee, would phone MNC on the morning of each business day and speak with MNC's vice-president of operations, Stephen Cromwell. The parties would discuss (1) the amount of the checks written by the debtor that would be presented to the MNC subsidiary, Maryland National Bank, for payment that day, and (2) the funds that MNC would make available to the debtor's account to honor those checks. The debtor's sole operating cash was located in Maryland National Bank whereas all receivables proceeds were placed in an account controlled by MNC and located at Continental Bank. By agreement between MNC and the debtor, funds to cover the checks were placed in the Maryland National Bank account twenty-four hours after the checks were presented. All monies with respect to Merrey and Jersey Coast were handled through these same accounts, and the loan and advances were all computed including the two subsidiaries. The financing agreement gave MNC the right to demand immediate repayment of the overadvance and, if not repaid, declare the loan in default. MNC also had the right to refuse to advance additional loan funds or make available to the debtor the proceeds of its receivables.
The debtor received inventory from different tobacco companies on a daily basis and was given twelve-fifteen days to pay the invoice (except for American Cigar, which allowed thirty days for payment). Periodically, tobacco suppliers would offer special buying programs in advance of price increases and would allow the debtor to: (1) purchase at pre-increase price; (2) take additional time to pay; or (3) purchase in greater quantities than usual. The debtor usually participated in these programs and so informed MNC.
By the early part of 1984, MNC became concerned about the debtor's ability to repay its loan. At this time, MNC classified the loan in the "watch" category and further reduced the classification to "substandard" by October 1985. In late 1985, Robert Stewart, MNC president, assumed final decision-making authority as to the loan previously overseen by Cromwell and Stewart and Cromwell consulted daily with Stewart regarding the loan. Moreover, as of August 19, 1985 the credit committee, which had previously reviewed the loan, ceased to do so and Stewart and Cromwell assumed this function.
In May 1985, the debtor and MNC discussed plans to liquidate debtor's assets and repay all of the debtor's creditors. Robert Stewart was aware of the liquidation plan, which was expected to be complete within three-five months with a "target date" of January 1, 1986. A condition of the plan was the debtor's reduction of the overadvance by $50,000 per week.
In September 1985, the debtor started to sell its assets. In a sale financed by MNC, Merrey was sold to Thomas J. Kline, Inc. ("Kline") in December, and MNC credited the debtor's account by $1,733,800....
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