In re Philip Services (Delaware), Inc.
| Decision Date | 21 September 2001 |
| Docket Number | 99-2385 (MFW) to 99-2518(MFW). Adversary No. 99-346(MFW).,Bankruptcy No. 99-2170 (MFW) |
| Citation | 267 BR 62 |
| Parties | In re PHILIP SERVICES (DELAWARE), INC., et al., Reorganized Debtors. Philip Services Corporation and Luntz Corporation, Plaintiffs, v. Andrew Luntz, Gregory Luntz, Individually and in his capacity as Representative of Certain Shareholders of Pre-Merger Luntz Corporation, John Luntz and McDonald & Company Securities, Inc., Defendants. |
| Court | U.S. Bankruptcy Court — District of Delaware |
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Gregg M. Galardi, Esquire, Van C. Durrer, II, Esquire, Skadden Arps Slate Meagher & Flom, LLP, Wilmington, DE, Edward J. Meehan, Esquire, Rachel Mariner, Esquire, David E. Carney, Esquire, Skadden Arps Slate Meagher & Flom, LLP, Washington, DC, for Plaintiffs.
J.R. Julian, Esquire, J.R. Julian, P.A., Wilmington, DE, Nathaniel Metz, Esquire, Craig R. Trachtenberg, Esquire, Stuart M. Brown, Esquire, Buchanan Ingersoll, P.C., Philadelphia, PA, for Luntz Defendants.
Kevin Gross, Esquire, Rosenthal, Monhait, Gross & Goddess, P.A., Wilmington, DE, for Defendant McDonald & Company Securities, Inc.
Robert Brady, Esquire, Joel Waite, Esquire, Young Conaway Stargatt & Taylor, LLP, Wilmington, DE, Howard S. Beltzer, Esquire, Evan C. Hollander, Esquire, Daniel P. Ginsberg, Esquire, White & Case LLP, New York City, for The Bank Group.
Before the Court is the Plaintiffs' Motion for Judgment on the Pleadings and the Defendants' Response thereto. For the reasons set forth below, we deny the Plaintiffs' Motion.
Philip Services Corporation ("PSC") is a Canadian corporation with its principal place of business in Hamilton, Ontario, Canada. In 1997, PSC acquired 100% of the stock of the Luntz Corporation pursuant to a Merger Agreement dated December 30, 1996. PSC issued a Promissory Note due on January 7, 1999, in the amount of $5 million as payment for the stock. John Luntz, Andrew Luntz and Gregory Luntz (collectively "the Luntz Defendants") were former shareholders of the Luntz Corporation and beneficiaries of the Promissory Note.2 The Luntz Defendants continued as officers and/or directors of the Luntz Corporation after the merger.3
On or about August 11, 1997, PSC entered into a credit agreement with certain lenders ("the Pre-Petition Secured Lenders"). The obligation of PSC was guaranteed, inter alia, by the Luntz Corporation in the amount of $1.5 billion.
In 1998 the financial condition of PSC and its affiliates deteriorated. On November 13, 1998, PSC announced that it was suspending the payment of interest on the secured debt. That same day, certain of the creditors of PSC and its affiliates announced they would file an involuntary petition in bankruptcy against them if they did not negotiate a pre-packaged plan of reorganization.
On November 16, 1998, the Luntz Defendants caused the Luntz Corporation to pre-pay the Promissory Note in the amount of $5 million to an account at McDonald & Company Securities, Inc. ("McDonald"), in the name of Gregory Luntz as representative of the former Luntz shareholders.
On June 25, 1999, PSC, the Luntz Corporation and several of their affiliates filed voluntary petitions under chapter 11 of the Bankruptcy Code. By Order dated July 29, 1999, the Court approved the Amended Final Stipulation and Order Authorizing and Restricting Use of Cash Collateral and Granting Adequate Protection of Certain Secured Claims ("the Cash Collateral Stipulation"). The Cash Collateral Stipulation provided that if no party filed an action contesting the validity or enforceability of any claim of the Pre-Petition Secured Lenders on or before September 10, 1999 (extended to October 8, 1999, for the Creditors' Committee) then those claims would be allowed without subordination, setoff, counterclaim, defense or objection, for all purposes. (Cash Collateral Stipulation at ¶ 47.) No such action was filed.
On September 24, 1999, PSC and the Luntz Corporation ("the Plaintiffs") commenced this adversary proceeding against the Luntz Defendants and McDonald seeking avoidance of the November 16, 1998, payment as a preference and turnover of the $5 million in the account at McDonald asserting it is property of the estate. The Defendants filed answers asserting, inter alia, that the Luntz Corporation was not insolvent at the time of the transfer, because the guarantee of the debt to the Pre-Petition Secured Lenders was itself avoidable as a fraudulent conveyance. On November 9, 2000, the Plaintiffs filed the instant Motion for Judgment on the Pleadings. Responses and replies have been filed.
This Court has jurisdiction over this matter as a core proceeding pursuant to 28 U.S.C. §§ 1334 and 157(b)(1), (b)(2)(A), (F), (H), (M), and (O).
Under Rule 12(c) of the Federal Rules of Civil Procedure, incorporated by Rule 12(b) of the Federal Rules of Bankruptcy Procedure, a motion for judgment on the pleadings should be granted where the moving party has established on the face of the pleadings that there is no material issue of fact and it is entitled to judgment as a matter of law. See, e.g., Hal Roach Studios, Inc. v. Richard Feiner & Co., 896 F.2d 1542, 1550 (9th Cir.1989). Like a motion to dismiss under Rule 12(b)(6), we must accept as true the allegations set forth in the Defendants' answers and determine whether the Defendants could prove no set of facts which would support their defenses. See, e.g., Soto v. PNC Bank (In re Soto), 221 B.R. 343, 347 (Bankr.E.D.Pa.1998), citing Jablonski v. Pan American World Airways, Inc., 863 F.2d 289, 290-91 (3d Cir.1988); In re J.E. Jennings, Inc., 46 B.R. 167, 169 n. 3 (Bankr.E.D.Pa.1985). In making our determination, we may take judicial notice of pleadings of record. See, e.g., Institute for Scientific Information, Inc. v. Gordon & Breach, Science Publishers, Inc., 931 F.2d 1002, 1011 (3d Cir.1991); Southmark Prime Plus, L.P. v. Falzone, 776 F.Supp. 888, 893 (D.Del.1991).
In this case, the Plaintiffs' Complaint pleads all the elements necessary for avoidance of a preference: that the $5 million pre-payment was a transfer of property of the Luntz Corporation, to or for the benefit of a creditor (the beneficiaries of the Promissory Note), on account of an antecedent debt owed by the Luntz Corporation, while the Luntz Corporation was insolvent, within one year of the bankruptcy filing (since the Luntz Defendants are Insiders as defined by the Bankruptcy Code), which caused the Luntz Defendants to receive more than they would under a chapter 7 liquidation.
The Luntz Defendants' primary defense is that the Luntz Corporation was not insolvent at the time of the transfer. They argue that the Luntz Corporation's guarantee of the debt owed by PSC to the Pre-Petition Secured Lenders is avoidable as a fraudulent conveyance since the Luntz Corporation did not receive fair consideration for that guarantee. For purposes of this Motion, we assume that the facts set forth in the Luntz Defendants' answer are true. The Plaintiffs counter that the Luntz Defendants cannot raise this defense because the issue of the validity of the guarantee was conclusively decided by approval of the Cash Collateral Stipulation.
The Plaintiffs assert that the doctrine of law of the case requires a finding that the Luntz Corporation's guarantee of the debt owed to the Pre-Petition Secured Lenders is valid. They assert that, by approving the Cash Collateral Stipulation, the Court previously determined that the guarantee was valid and not avoidable. Therefore, they assert the law of the case doctrine precludes this Court from revisiting this issue.
The law of the case doctrine provides that when a court actually decides a rule of law, that decision should continue to govern the same issues in subsequent stages in the same case. However, that doctrine only applies to issues that were actually litigated and decided by the court. See, e.g., AL Tech Specialty Steel Corp. v. Allegheny Int'l Credit Corp., 104 F.3d 601, 605 (3d Cir.1997) (); Brown v. Flater, 1996 WL 434192, at *2 (E.D.Pa. July 31, 1996) ().
In this case, the issue of the avoidability of the guarantee was never litigated. Although the Debtors conceded the point, the Luntz Defendants did not: they were not signatories to the Cash Collateral Stipulation. Nor did any other party raise the issue by objection to the Cash Collateral Stipulation or by the filing of a fraudulent conveyance action against the Pre-Petition Secured Lenders. Therefore, the matter has not been previously litigated before the Court. The doctrine of law of the case, therefore, has no applicability.
Further, the law of the case doctrine does not act as an absolute bar on relitigation (in contrast to the doctrines of claim and issue preclusion). Rather the law of the case doctrine merely directs the court's discretion not to rehear matters ad nauseam. Arizona v. California, 460 U.S. 605, 618, 103 S.Ct. 1382, 75 L.Ed.2d 318 (1983); Messenger v. Anderson, 225 U.S. 436, 444, 32 S.Ct. 739, 56 L.Ed. 1152 (1912) ().
In this case, we are not convinced that the law of the case doctrine warrants that we disallow the defense. We are particularly hesitant to apply the law of the case to a determination made in the main bankruptcy case to an issue raised in an adversary proceeding between two parties, one of whom was not a contestant in the prior matter. The provision in the Cash Collateral Stipulation confirming the validity of the position of the Pre-Petition Secured...
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Insurance Company of the State of Pennsylvania v. Hsbc Bank Usa, 6904.
...even less likely to be applied in the context of a bankruptcy proceeding than in ordinary civil litigation (see In re Philip Servs. [Del.], Inc., 267 BR 62, 67-68 [D Del 2001]). Thus, claims not specifically raised before a bankruptcy court are less likely to be deemed precluded in later li......