In re Morse Tool, Inc.
| Decision Date | 14 December 1992 |
| Docket Number | Adv. No. A87-1303.,Bankruptcy No. 87-10588-CJK |
| Citation | 148 BR 97 |
| Parties | In re MORSE TOOL, INC., Debtor. David J. FERRARI, Trustee of Morse Tool, Inc., Plaintiff, v. BARCLAYS BUSINESS CREDIT, INC., f/k/a Barclays American/Business Credit, Inc., Defendant. |
| Court | U.S. Bankruptcy Court — District of Massachusetts |
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Gene Landy, Sp. Counsel, Mark Berman, Boston, MA, for trustee.
Charles Bennett, Boston, MA, for Barclays Business Credit, Inc.
On August 24, 1984, Gulf and Western Manufacturing Company ("G & W")1 sold the assets and liabilities of its unincorporated Morse Cutting Tool and Super Tool divisions ("the Divisions"), both of which manufactured industrial cutting tools, to a new entity, Morse Tool, Inc. ("Morse" or "the Debtor"), which had neither assets nor liabilities. In exchange, Morse gave G & W cash in the amount of $3,821,000 and promissory notes for an additional $6,889,000, and it pledged its real estate and equipment to G & W to secure the notes. Morse financed the cash portion of the purchase price entirely with a loan from the defendant, Barclays American/Business Credit, Inc., known now as Barclays Business Credit, Inc. ("Barclays"); in conjunction with the loan, Morse gave Barclays a promissory note and a first position security interest in its inventory and accounts receivable. Within three years, Morse filed a petition under Chapter 11 of the Bankruptcy Code, succumbed to overwhelming debt, and, while in Chapter 11, sold its manufacturing operations. The case was later converted to a liquidation proceeding under Chapter 7.
The case is before the Court now on the objection of the Chapter 7 Trustee, David Ferrari ("the Trustee"), to Barclays' secured claim. On the basis of the note and security interests it received in the above transactions, Barclays asserts a secured claim against the Morse bankruptcy estate of $3,655,855.25. In objection to Barclays' claim, the Trustee argues that Morse's obligation to Barclays and Morse's conveyance of security interests to Barclays were fraudulent under sections 4, 5, and 7 of the Uniform Fraudulent Conveyance Act ("UFCA") as adopted in Massachusetts, G.L. c. 109A, §§ 4, 5, and 7. Therefore, the Trustee argues, the Court should annul the obligation, set aside the security interests, and order Barclays to return to the estate all amounts paid on its claim since Morse filed its bankruptcy petition, plus all interest and costs it has charged and been paid on the loan. In the alternative, the Trustee also argues under 11 U.S.C. § 510(c) that Barclays' liens should be set aside and its claim subordinated to the claims of unsecured creditors. Barclays denies the allegations and interposes several affirmative defenses.
This memorandum of decision sets forth the Court's findings of fact and conclusions of law on the Trustee's objection to Barclays' claim. The Court concludes that judgment should enter for Barclays on each count asserted by the Trustee.
Morse filed its petition for relief under Chapter 11 of the Bankruptcy Code on January 28, 1987. While in Chapter 11, Morse remained a debtor-in-possession and continued its manufacturing operations until the summer of 1987. That summer, in a sale conducted under 11 U.S.C. § 363, Morse sold its manufacturing operations, including most of its assets, to M.T.I. Holding Corporation ("M.T.I."). The Bankruptcy Court approved the sale with a "Confirmatory Order" dated June 15, 1987 (Ex. 68) and a further "Order Amending Order Authorizing Sale" dated June 25, 1987 (Ex. 73).
The Confirmatory Order, as amended, authorized Morse to transfer Barclays' collateral to M.T.I. Holding Corporation free and clear of Barclays' liens. It also permitted payment of Barclays' secured claim out of the proceeds of the sale and set forth a procedure for adjudicating that claim. (Ex. 73, pp. 2-3.)
In accordance with this order, M.T.I. paid Barclays $3,625,000 on its claim.2 And Barclays furnished a payoff letter to the Official Committee of Unsecured Creditors.3 The letter asserts and itemizes a total secured claim of $3,655,855.25, acknowledges payment from M.T.I. of $3,625,000.00, and reports an unpaid balance of $30,855.25.
On August 27, 1987, and within the time prescribed in the Confirmatory Order, the Creditors Committee and David J. Ferrari, as Chapter 11 Trustee of Morse Tool, Inc.,4 filed jointly their Objection to Secured Claim of Barclays American/Business Credit, Inc. Barclays filed a Response to the Objection on September 23, 1987, and, with the Court's permission, an amendment to the Response on October 1, 1987. Then, on October 29, 1987, the Court, for ease of administration, ordered that the contested matter commenced by the Objection to Secured Claim be converted to an adversary proceeding under Bankruptcy Rule 7001.
On November 18, 1987, with the Court's permission, David Ferrari, in his capacity as Interim Chapter 7 Trustee, filed an Amended Objection to Barclays' secured claim. Barclays filed its answer to this pleading on March 31, 1988. And finally, on July 21, 1988, Ferrari, this time in his capacity as Chapter 7 Trustee,5 filed a Second Amended Objection and Adversary Complaint to Secured Claim of Barclays American/Business Credit, Inc. Barclays filed its answer to the Second Amended Objection and Adversary Complaint on August 19, 1988.6
The only unresolved objections to Barclays' claim are objections to the claim as a whole.7 In the payoff letter, Barclays asserts a secured claim in the total amount of $3,655,855.25. In objection, the Trustee argues that Barclays' claim, which arose from the loan it made in August, 1984, was thus part of a leveraged buy-out ("LBO") in which Barclays and G & W drained Morse of its equity and gave it nothing in return but control of its own stock. Neither G & W nor Barclays gave Morse fair consideration for the notes and security interests they received. Rather, the LBO rendered Morse insolvent and left it with unreasonably small capital to carry on its business. Moreover, Barclays participated in this LBO with actual intent to hinder, delay, and defraud Morse's creditors.
On the basis of these allegations, the Trustee argues that Morse's obligation to Barclays and Morse's conveyance of security interests to Barclays were fraudulent under sections 4, 5, and 7 of the Uniform Fraudulent Conveyance Act (UFCA) as adopted in Massachusetts, G.L. c. 109A, §§ 4, 5, and 7. Therefore, the Trustee argues, the Court should annul the obligation, set aside the security interests, and order Barclays to return to the estate all amounts paid on its claim since Morse filed its bankruptcy petition, plus all interest and costs it has charged and been paid on the loan. In the alternative, the Trustee argues under 11 U.S.C. § 510(c) that Barclays' liens should be set aside and its claim subordinated to the claims of unsecured creditors.8
Barclays denies the allegations on which these causes of action are founded. Contesting the Trustee's characterization of the August 1984 transaction as an LBO and a stock sale, Barclays argues that the transaction was simply an asset sale in which Morse received fair consideration in the form of the assets it received from G & W.
Barclays also interposes three affirmative defenses. First, Barclays argues that it did not act with actual fraudulent intent and, therefore, under G.L. c. 109A, § 9(2), may retain its property and obligation as security for repayment. Second, Barclays argues that as a result of a release given by Morse, as Debtor-in-Possession, to Gulf & Western, Inc. (as successor in interest to Gulf & Western Mfg. Co.), the Trustee's fraudulent conveyance and equitable subordination claims against Morse have also been released. And third, as a result of the compromise agreement in which the above release was given, the Trustee's claims against Barclays have been satisfied.
Upon pretrial motions for partial summary judgment, the Court has ruled on certain discrete issues of law. The Court ruled that the Trustee's fraudulent conveyance claims are governed by Massachusetts law and that qualified unsecured creditors exist with respect to the Trustee's fraudulent conveyance claims under G.L. c. 109A, §§ 5 and 7, and, therefore, that the Trustee has authority under 11 U.S.C. § 544(b) to proceed under those sections. The Court's rulings on these issues, which are set forth in memoranda and orders issued on December 22, 1989, are hereby incorporated by reference into this memorandum. 108 B.R. 384. However, the Court's rulings with respect to motions for partial summary judgment that were denied — those addressing the issues of release, satisfaction, and the existence of qualified unsecured creditors under G.L. c. 109A, § 4—are not carried forward but instead are superseded by the rulings in this memorandum.
The evidence received in the trial of this adversary proceeding consists of ten days of trial testimony, the deposition testimony of eighteen witnesses (submitted in lieu of live testimony by agreement of the parties), and 116 trial exhibits. The evidence also includes a stipulation as to certain facts relating to the transaction of August 24, 1984; the stipulation was received into evidence as the first exhibit.9
The Trustee submitted by affidavit the direct testimony of four expert witnesses: Allen Michel (Exs. 100 and 101), Robert Elliott (Ex. 97 and 98), Edward Burrows (Ex. 106), and Israel Shaked (Ex. 117).10 These witnesses were made available for cross-examination in court, and Barclays was in each case afforded an opportunity to raise evidentiary objections to the testimony in the affidavits. Barclays...
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