In re National Hydro-Vac Indus. Services, L.L.C.

• Decision Date: 15 June 2004
• Docket Number: Bankruptcy No. 5:01-BK-50466M.,Adversary No. 5:01-AP-5016.
• Citation: 314 B.R. 753
• Parties: In re NATIONAL HYDRO-VAC INDUSTRIAL SERVICES, L.L.C., Debtor. National Hydro-Vac Industrial Services, L.L.C., Plaintiff, v. Federal Signal Corporation; Guzzler Manufacturing, Inc., Defendants, Transamerica Equipment Financial Services Corporation, Intervener.
• Court: U.S. Bankruptcy Court — Eastern District of Arkansas

314 B.R. 753

In re NATIONAL HYDRO-VAC INDUSTRIAL SERVICES, L.L.C., Debtor National Hydro-Vac Industrial Services, L.L.C., Plaintiff, v. Federal Signal Corporation; Guzzler Manufacturing, Inc., Defendants Transamerica Equipment Financial Services Corporation, Intervener.

Bankruptcy No. 5:01-BK-50466M.

Adversary No. 5:01-AP-5016.

United States Bankruptcy Court, E.D. Arkansas, Pine Bluff Division.

June 15, 2004.

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Brian Rosenthal, Herbert C. Rule, III, Rose Law Firm, Kevin P. Keech, Keech Law Firm, Little Rock, AR, for Debtor.

Thomas S. Streetman, Streetman, Meeks & McMillan, Crossett, AR, for Trustee.

William S. Meeks, Streetman, Meeks & McMillan, Crossett, AR, pro se.

Charles W. Tucker, U.S. Trustee's Office, Little Rock, AR, for U.S. Trustee.

Stephen L. Gershner, Davidson Law Firm, Little Rock, AR, for Defendant.

MEMORANDUM OPINION

JAMES G. MIXON, Bankruptcy Judge.

National Hydro-Vac Industrial Services, L.L.C. ("Debtor") petitioned for relief under the provisions of Chapter 11 of the United States Bankruptcy Code on March 15, 2001. On April 3, 2001, the Debtor filed a complaint against Federal Signal Corporation ("Federal Signal") for the turnover of three specially manufactured pieces of equipment or the proceeds from the sale of the units in the sum of $188,000.00.

Transamerica Equipment Financial Services Corporation ("Transamerica") filed a complaint in intervention on June 26, 2001, alleging that it held perfected security interests in the three units in question, which were allegedly sold by Federal Signal. Transamerica asserted a lien in the sale proceeds held by Federal Signal.

On June 27, 2001, the Debtor's complaint was amended to add Guzzler Manufacturing, Inc. ("Guzzler"), a subsidiary corporation of Federal Signal, as a party defendant. The amended complaint alleged conversion and breach of fiduciary duty on the part of both defendants. The amended complaint asked for the turnover of the sale proceeds of the units in question pursuant to 11 U.S.C. § 542, damages resulting from conversion of the property, punitive damages, attorney's fees, and costs.

Federal Signal's answer to the original complaint denied that it had any property of the Debtor and asserted that the equipment in question had been sold prior to the date the bankruptcy petition was filed. Federal Signal filed an answer to Transamerica's complaint in intervention, alleging that it lacked knowledge of Transamerica's rights. On July 13, 2001, Federal Signal and Guzzler answered the first amended complaint, denying the allegations and asserting a right of setoff.

Subsequently, the case was converted to Chapter 7 on July 20, 2001, and William S. Meeks was appointed Trustee. After the conversion, the Trustee assumed the Debtor's cause of action.

Trial on the merits was held in Little Rock, Arkansas, on January 29, 2004, and the matter was taken under advisement to review the evidence and briefs. This Court has jurisdiction in accordance with 28 U.S.C. § 1334 and § 157. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(E) (2000), and this Court may enter a final judgment in this case. The following shall constitute the Court's findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.

FACTS

The Debtor is an Arkansas limited liability company formed at Pine Bluff, Arkansas, and later headquartered in the Houston, Texas, area. (Tr. at 105.) At some point in time prior to spring of 2000, the Debtor purchased certain assets of the Freemyer Company. These assets included the three industrial vacuum units manufactured by Guzzler that are the subject of this litigation.

TWO UNITS SOLD TO VAC-TECH

John Stafford, the Used Equipment and Service Sales Manager of Guzzler in 2000, was called as a witness by the Trustee. He testified that sometime in early 2000 (at least a year prior to the bankruptcy filing), he was contacted by Guzzler's New Equipment Sales Manager about a possible transaction whereby the Debtor would transfer three pieces of used equipment in exchange for the purchase of one new one. (Tr. at 13.)

Stafford expressed interest in the transaction but wanted to inspect the equipment. As a result, the equipment was transported to Birmingham, Alabama, for inspection. The inspection was conducted at some time prior to April and was satisfactory. He said the New Equipment Sales Manager subsequently "proceeded with a deal to trade three in for one new one." (Tr. at 15.)

Stafford began contacting customers to resell three units. He stated, "In the process of our contact, we started to refurbish the vacuum equipment and make lists and that sort of thing to decide what needed to be done to the equipment so that it could be sold." (Tr. at 16.)

Guzzler reached an agreement with Vac-Tech, a company located in Australia, and entered into a written contract to sell two of the units at issue to Vac-Tech. The sale and delivery were completed by August 2000. The purchase price for each of the units was $110,000.00.

Stafford testified that the original trade-in deal with the Debtor fell through and subsequently Guzzler reached an agreement with the Debtor to sell two of the units to Guzzler for $65,000.00 each. Stafford never testified as to exactly when the oral agreement to sell the units occurred. He said, "I originally prepared these Bills of Sale [between the Debtor and Guzzler] for $75,000.00 when they [sic] agreement was made on the first unit. That's when we agreed to take the three trades for one. I made the Bills of Sale somewhere in that time frame." (Tr. at 81.)

Stafford stated that he listed $75,000.00 as the purchase price in the two bills of sale even though the true sale price was $65,000.00. This was done, he said, to conceal the real selling price. Stafford stated after the sales from the Debtor to Guzzler were completed, Guzzler determined to exercise its right of set off and credited the sale price against the Debtor's account with Guzzler.

Robert Racic, a former employee of Federal Signal, was called as a witness by the Debtor. He acknowledged that the Debtor's account with Federal Signal Leasing maintained on behalf of Guzzler was credited in the amount of $97,973.32 in November 2000 and, at that point, there was still a balance of $97,803.44 that was past due.¹ This credit was applied from the proceeds of the sale of the two units to Vac-Tech. He acknowledged he received the $110,000.00 purchase price per unit from Vac-Tech June 21, 2000, but the credit to the Debtor's account of $97,973.32 did not occur until November 1, 2000. The Debtor's separate account with Guzzler was credited in the amount of $32,026.68. (Pl.'s Ex. 5.) Thus, the Debtor received a total of $130,000.00 in credit toward various accounts owed to Federal Signal and Guzzler.

The relevant events were recalled by the Debtor's former President, Raymond Pascale. He testified that after the Debtor purchased some tractor-mounted vacuum units, he had asked Guzzler to inspect the equipment. The two units later sold to Vac-Tech and other units were transported to Guzzler's facility in Alabama. He stated that Stafford called him some time in May or June 2000, and asked if Pascale would be willing to sell two trailer-mounted vacuum units. (Tr. at 107.) The units were encumbered by a lien securing a debt to Transamerica. After some negotiation, Pascale indicated a willingness to sell the units for $75,000.00 each and Stafford agreed to that price.

Stafford prepared two bills of sale for each of the units, both dated August 1, 2000, and forwarded them to Pascale. (See Pl.'s Exs. 17, 18.) The bills of sale reflected the Debtor as the seller and Guzzler as the buyer. (Tr. at 109.) The stated purchase price was $75,000.00 for each unit.

Pascale signed both bills of sale as representative of the Debtor and returned them to Stafford around August 1, 2000. Pascale testified that Transamerica had been granted a lien in the 80 units purchased from Freemyer by the Debtor, and a "certain value" had been assigned to each of the units. (Tr. at 110.) From the proceeds of the sale of the two units, Pascale intended to pay some or all of the indebtedness owed on each unit to Transamerica. He stated $75,000.00 for each of the units sold to Guzzler would be "a bit short" in defraying the indebtedness to Transamerica. (Tr. at 110.)

The Debtor never received any of the proceeds from the sale of the two units to Guzzler. Pascale testified that he never authorized Guzzler or Federal Signal to setoff or credit the sale proceeds against the Debtor's obligation to Guzzler or Federal Signal. He stated he was surprised when the Debtor's account with Guzzler was credited rather than the proceeds being sent to the Debtor. (Tr. at 114.) Pascale did not testify when payment was due from Guzzler to the Debtor, except he stated that he expected to receive $150,000.00 after he signed the two bills of sale. (Tr. at 110.)

THIRD UNIT SOLD TO ACE PIPE

Pascale also testified about the sale of the third unit. The third unit was apparently transported to Guzzler's facility in Alabama at the same time as the other two units that were sold to Vac-Tech. Pascale stated that before any inspection or refurbishing was authorized, he received a call from Stafford asking if he would sell the unit for $58,000.00 and Pascale agreed. He stated that he was not certain who the buyer was. He said he intended to pay off Transamerica with the sale proceeds but he never received any proceeds from Guzzler.

Stafford testified that Guzzler was acting as a broker for the Debtor to sell the third unit to Ace Pipe. Exhibit 13 contained an inter-company message confirming the details of the transaction as follows:

The unit was sold to Ace Pipe for $62,500.00. Of these proceeds, $4,500 was to be retained by Guzzler and the remaining $58,000.00 sent to National Hydro-Vac. However,...