In re Del-Met Corp.
| Decision Date | 04 March 2005 |
| Docket Number | Bankruptcy No. 01-13208-KML-3-7.,Bankruptcy No. 01-13209-KML-3-7.,Adversary No. 303-0873A. |
| Parties | In re DEL-MET CORP. and Del-Met of Tennessee, Inc., Debtors. Susan R. Limor, Trustee, Plaintiff, v. Michael Buerger, Del-Met Winchester, Inc., DM Winchester, LLC, Zanini Auto Grup, S.A., Zanini Tennessee, Inc., General Motors Corporation, Johnson Controls, Inc., Lear Corporation, Bank One, N.A., BBK, Ltd., J.R. Buerger, Carson Fischer, P.LC., Conway Fischer, P.LC., Conway Mackenzie & Dunleavy, Del-Met Sales, Inc., GMAC Business Credit LLC, Briguglio Woods & Associates, CPA, PC., and Doe Defendants 1-100, Defendants. |
| Court | United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Middle District of Tennessee |
Roy C. Desha, Nashville, TN, for Debtors.
Ten remaining Defendants1 move to dismiss the First Amended Complaint filed by the Trustee in these consolidated adversary proceedings. The motions will be granted in part and denied in part as explained below.
The Plaintiff, Susan R. Limor, is the trustee for two Chapter 7 debtors, Del-Met Corporation ("DMC") and Del-Met of Tennessee, Inc. ("DMT").
Defendant Michael Buerger ("Buerger") is the 100 percent owner and only director of DMC and DMT. Buerger also owned 100 percent of Defendant Del-Met Winchester, Inc. ("DMW"). Collectively, Debtors DMC and DMT and Defendant DMW are sometimes called the "Del-Met companies."
Defendants General Motors Corporation ("GM"), Johnson Controls, Inc. ("JCI") and Lear Corporation ("Lear") were customers of the Del-Met companies. The Plaintiff refers to these three Defendants as the "Controlling Customers."
Defendants Bank One, N.A. ("Bank One") and GMAC Commercial Finance LLC (successor by merger to GMAC Business Credit, LLC) ("GMAC") provided financing to the Del-Met companies.
Defendant BBK, Ltd. ("BBK") provided management to the Debtors.
Defendant Conway MacKenzie & Dunleavy ("CMD") is a consulting firm that provided financial and accounting services to the Debtors.
Defendant Carson Fischer, PLC ("CF") provided legal services to the Debtors.
DMC and DMT filed Chapter 7 cases on November 28, 2001. Susan Limor was appointed Chapter 7 trustee. Two years after the petitions, on November 28, 2003, the trustee filed this adversary proceeding styled: "Trustee's Complaint for the Avoidance and Return of Preferential Payments and Fraudulent Transfers, Equitable Subordination, and Damages, Together With Objections and Counterclaims to Creditor-Defendants' Claims" ("original Complaint").
After a pretrial conference on April 19, 2004 and a skirmish with respect to the scope of discovery, the Trustee filed a First Amended Complaint on June 1, 2004. Motions to dismiss were filed by all Defendants that challenge the sufficiency of the original Complaint and the First Amended Complaint. Defendants' Motions also challenge whether the First Amended Complaint could cure alleged defects in the original Complaint given that the limitation on a trustee's avoidance powers in 11 U.S.C. § 546(a)2 expired on November 28, 2003.
Four days before oral argument on Defendants' Motions to dismiss, the Trustee filed an "Expedited Motion for Leave to Supplement Trustee's First Amended Complaint." Citing Rule 15(d) of the Federal Rules of Civil Procedure, the Plaintiff sought to add to the First Amended Complaint "events which occurred after the date that the plaintiff's complaint was filed." The supplemental material offered by the Plaintiff was a discovery response from Defendant Buerger listing "payments made by Del-Met companies" to Buerger between December 2000 and January 2004. Defendant Buerger objected to Plaintiff's expedited motion to supplement the First Amended Complaint.
These facts are as alleged in the Plaintiff's First Amended Complaint and do not constitute findings by the court.
Prior to 2000, the Del-Met companies — DMC, DMT and DMW — were a highly profitable supplier of parts to the automotive industry. Buerger owned the stock of all three entities.
In 1999, DMC, DMT and DMW had over 500 employees and total sales of $71,583,567. As of December 31, 1999, Del-Met had collectable accounts receivable of $18,507,556. Assets of Del-Met at the end of 1999 included machinery and equipment valued at $20,274,791, buildings and improvements totaling $2,649,438 and patents and trademarks valued at $122,989. In 1999, Del-Met distributed over $3,200,000 to Buerger. At December 31, 1999, DMC had retained earnings of $7,259,320. In contrast, at that same date, DMW had retained earnings of negative $711,844.
For several years before 2000, Bank One was Del-Met's lead lender. Bank One had a security interest in all of DMC's and DMT's machinery, equipment and accounts receivable. As of December 31, 1999, Del-Met owed Bank One $12,818,622 — approximately $5,000,000 less than the collectible accounts receivable owed to Del-Met at that time. The debts of Del-Met to Bank One were personally guaranteed by Buerger.
GM, JCI and Lear were Del-Met's three largest customers. Del-Met was a direct supplier of automotive parts to GM and sold parts to JCI and Lear who then sold products fabricated from those parts to GM and other automobile companies.
In 1999, Del-Met had a contract with GM to manufacture and supply the center console for the Cadillac Escalade at a fixed price. A sharp increase in the price of leather rendered this contract unprofitable. In 1999 and 2000, Del-Met expanded sales to JCI and Lear including undertaking tooling management programs at the request of JCI and Lear.
By early 2000, Del-Met's cash position was negatively impacted by: (1) inability to properly manage the cash requirements of the tooling programs; (2) assumption of a major loss contract from Lear; (3) the sharp increase in the price of leather to fulfill the Escalade contract with GM; and (4) operating losses in the traditional production of wheel covers due to capacity constraints and quality problems.
In 2000, Del-Met informed GM that it had stopped production of the center console for the hot-selling Cadillac Escalade due to the prohibitive cost of leather. Del-Met asked GM to allow a price increase under the Escalade contract to cover the increased cost of raw materials. GM refused to adjust the contract price and threatened to stop payments on nearly $20,000,000 in accounts receivable and to assert an offset for Del-Met's nonperformance of the Escalade contract. Similar problems arose under the contracts with JCI and Lear.
By September 2000, the Controlling Customers' refusal to pay accounts receivable rendered DMC and DMT unable to pay their liabilities as they became due.
In late 2000, the Controlling Customers "brought in" BBK to "take over" the operations of Del-Met and brought in CMD to take over the accounting functions of Del-Met. In his cross-claim against GM, JCI and Lear, Defendant Buerger describes this "take over" by the Controlling Customers more forcefully:
In early 2001, the Customers assumed control of all aspects of the operations of DMC and DMT. The customers engaged BBK, Limited ("BBK"), to manage the operations of DMC and DMT on a day-to-day basis. Individual representatives of BBK entered the premises of DMC and DMT for varying periods of time and assumed and performed all key management functions. In many cases, existing personnel of DMC and DMT were excluded, in whole or in part, from further participation in their historical duties. From this point forward, Michael Buerger was effectively precluded from further participation in the operations or management of DMC or DMT.
Although paid by Del-Met, BBK and CMD managed and operated Del-Met for the benefit of the Controlling Customers without regard to the impact on DMC, DMT or their creditors. BBK was only interested in funding materials and labor to fulfill the Del-Met contracts with GM, JCI and Lear. BBK refused to pay other "nonessential" debts. BBK and CMD managed and operated the Del-Met entities to fulfill unprofitable contracts with GM and JCI. On the Escalade contract alone, Del-Met was losing over $500,000 a month. BBK and CMD (First Am. Compl. ¶ 20.)
In furtherance of this scheme, beginning in mid-2000 and continuing into 2001, the Controlling Customers made direct payments to Del-Met's tooling vendors to gain control of "hostaged" tools and made direct payments to Del-Met's critical material suppliers to maintain production of parts needed by the Controlling Customers.
In early 2001, the Controlling Customers approached Bank One — Del-Met's lender — about restructuring Bank One's debt and collateral position. As "bargaining leverage," GM asserted that it would stop paying its accounts receivable and would exercise $6,500,000 in offsets against the bank's collateral if Bank One did not renegotiate its loan and collateral position.
On April 10, 2001, the Controlling Customers, Bank One, Del-Met and Buerger entered into an "Accommodation Agreement." As described by the Plaintiff, this agreement:
provided that Bank One would forbear on its loan default claims through July 31, 2001 to enable GM, JCI and Lear to meet Del-Met's future working capital needs outside of bankruptcy, and so GM, JCI and Lear could attempt to find buyers for Del-Met's facilities to continue their production of parts.... GM, JCI and Lear agreed to up-front payments to Bank One of approximately...
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