In re Phoenix Restaurant Group, Inc.

• Decision Date: 08 August 2007
• Docket Number: Bankruptcy Adv. No. 03-0568A.,No. 3:06-0881.,3:06-0881.
• Citation: 373 B.R. 541
• Parties: In re PHOENIX RESTAURANT GROUP, INC., et al., Reorganized Debtors. Phoenix Restaurant Group, Inc., et al., Plaintiffs/Appellees, v. Proficient Food Company, Defendant/Appellant.
• Court: U.S. District Court — Middle District of Tennessee

373 B.R. 541

In re PHOENIX RESTAURANT GROUP, INC., et al., Reorganized Debtors.

Phoenix Restaurant Group, Inc., et al., Plaintiffs/Appellees, v. Proficient Food Company, Defendant/Appellant.

No. 3:06-0881.

Bankruptcy Adv. No. 03-0568A.

United States District Court, M.D. Tennessee, Nashville Division.

August 8, 2007.

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Timothy G. Niarhos, Crocker & Niarhos, Nashville, for Phoenix Restaurant Group, Inc.

Russell Henry Hippe, Jr., Madison Lisa Martin, Stites & Harbison, PLLC, Nashville, TN, Mark I. Duedall, Jennifer Meyerowitz, Jason Watson, Allston & Bird, Atlanta, GA, for Proficient Food Co.

MEMORANDUM

ROBERT L. ECHOLS, District Judge.

Pending before the Court is the timely direct appeal from the Bankruptcy Court's Final Judgment, entered in this adversary action on July 28, 2006, in favor of the Plaintiff/Appellee Plan Administrator and against Defendant/Appellant Proficient Food Company in the amount of $519,077.63. The Court has jurisdiction of the appeal pursuant to 28 U.S.C. § 158(a)(1).

I. FACTS AND PROCEDURAL HISTORY

Phoenix Restaurant Group, Inc. ("PRG"), and its affiliates Denam, Inc., Phoenix Foods, Inc., Black — Eyed Pea U.S.A., Inc., Prufrock Restaurants of Kansas, Inc., and Texas BEP, L.P., operated numerous Denny's and Black — Eyed Pea Restaurants in several states. Proficient Food Company ("Proficient") served as a vital supplier of food products to PRG's Denny's Restaurants prior to and during this bankruptcy proceeding.

On October 18, 2001 ("the Petition Date"), six creditors of PRG commenced an involuntary Chapter 7 bankruptcy case against PRG in Florida. On October 29, 2001, the Florida bankruptcy court transferred the proceeding to the Middle District of Tennessee where PRG's principal executive offices are located. On October 31, 2001, PRG sought to convert the involuntary Chapter 7 case to a reorganization proceeding under Chapter 11 of the Bankruptcy Code. PRG's affiliates filed voluntary Chapter 11 petitions on the same day.

On November 2, 2001, Proficient sent a letter to counsel for PRG, pursuant to 11 U.S.C. § 546 and Uniform Commercial Code § 2-702, demanding reclamation of food products supplied to Denny's Restaurants in the ten (10) days preceding the filing of the involuntary bankruptcy petition on October 18, 2001. Proficient stated that PRG owed it $540,048.60 for these deliveries and attached a list of related invoices. Proficient expressly reserved its rights and remedies under "any other applicable law, including but not limited to the Perishable Agricultural Commodities Act, 7 U.S.C. § 499a, et seq. CPACAIX (Docket Entry No. 1, Part 29.) In a second letter sent to PRG on November 7, 2001, Proficient supplied information to support its claim against PRG under PACA. (Docket Entry No. 1, Part 35.)

On November 6, 2001, the Bankruptcy Court granted the relief requested by PRG and its affiliates, and converted PRG's involuntary Chapter 7 case to a Chapter 11 proceeding. On November 13, 2001, the U.S. Trustee appointed five creditors, including Proficient, to the Creditors' Committee. On November 14, 2001, the Bankruptcy Court entered an Order consolidating the cases and providing for their joint administration. During these proceedings PRG and its affiliates¹ operated their businesses and/or managed their assets as debtors-in-possession under Sections 1107 and 1108 of the Bankruptcy Code.

On November 16, 2001, PRG filed a motion seeking discretionary authority to make payments to Proficient as a critical vendor ("the Critical Vendor Motion"). (Docket Entry No. 1, Part 33.) PRG stated in the Critical Vendor Motion that Proficient was the only supplier authorized and approved by Denny's to provide necessary inventory, PRG purchased approximately $250,000 of inventory from Proficient each week, and Proficient had threatened to stop supplying inventory unless PRG made arrangements for payments on Proficient's pre-petition claims of approximately $7 million. The Critical Vendor Motion set forth a list of terms for the making of these payments to Proficient.

The U.S. Trustee, the Creditors' Committee and LH Leasing Company objected to the Critical Vendor Motion, but ultimately a settlement was reached and the Bankruptcy Court entered an agreed Order on December 12, 2001. (Docket Entry No. 1, Part 36.) The Order provided that the "total to be paid to Proficient ... on account of its prepetition claims, PACA claims, and Reclamation claims is $900,000 (`Critical Vendor Payment')." (Id. at Supplemental Terms to Critical Vendor Motion.) Further, "[f]unds received by or on behalf of Proficient ... since [the] Petition Date in excess of cost of goods sold since the Petition Date will be credited against the Critical Vendor Payment (approximately $311,000 through November 26, 2001)." (Id.) The "[r]emainder of the Critical Vendor Payment will be paid $50,000 per week, by premium of $10,000 per day in wire transfer payments." (Id.) The "[b]alance of $900,000 will be paid at closing of sale as a super priority claim, junior only to Debtor in Possession financing liens. However, the balance loses its super priority status in the event of conversion to a chapter 7 case; in that instance, it will be on the same priority as other chapter 11 administrative claims." (Id.)

The Order further provided that, "[w]hen the Order approving the Critical Vendor Motion is final and not subject to appeal, Proficient Food Company's PACA claim of approximately $194,000 is waived." (Id.) Of particular importance to this appeal, the Order provided that "[a]ll Critical Vendor Payments will be applied first to payment of the reclamation claim of approximately $540,000." (Id.) In return for these payments, Proficient agreed to continue to sell goods to PRG through March 30, 2002.(Id.)

On October 23, 2002, the Bankruptcy Court confirmed the First Amended Joint Liquidating Plan of Reorganization ("the Plan"). Pursuant to the Confirmation Order, the estates of PRG and its affiliates were consolidated into a single estate to be administered by PENTA Advisory Services as Plan Administrator. Under the Plan, the Plan Administrator had all of the powers and duties of a trustee.

On October 18, 2003, the Plan Administrator filed over 200 adversary proceedings to avoid preferential transfers under 11 U.S.C."§ 547(b). This action filed against Proficient sought avoidance and recovery of payments totaling $3,707,311.97 made to Proficient by PRG during the ninety days before bankruptcy. Proficient pled various defenses, including statutory defenses of contemporaneous exchange, 11 U.S.C. § 547(c)(1); ordinary course of business, § 547(c)(2); and subsequent new value § 547(c)(4). Presently before this Court for review are the rulings of the Bankruptcy Court made on Proficient's motion for summary judgment and following trial.

II STANDARDS OF REVIEW

Under Federal Rule of Civil Procedure 56(c), which is made applicable to adversary proceedings and contested matters in bankruptcy cases by Federal Rules of Bankruptcy Procedure 7056 and 9014, summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of any material fact and that the moving party is entitled to judgment as a matter of law." Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). This Court reviews de novo the Bankruptcy Court's decision to deny summary judgment. In re Batie, 995 F.2d 85, 88-89 (6th Cir.1993).

The standard of review to determine if a lower court properly applied principles of judicial estoppel is de novo. Browning v. Levy, 283 F.3d 761, 775 (6th Cir.2002). But see Lewis v. Weyerhaeuser Co., 141 Fed.Appx. 420, 423-424 (6th Cir. 2005) (standard of review is abuse of discretion). Similarly, the standard of review for the Bankruptcy Court's decision to permit amendment of a complaint and relation back of an added cause of action is de novo. Miller v. American Heavy Lift Shipping, 231 F.3d 242, 246-247 (6th Cir. 2000).

This Court reviews the Bankruptcy Court's findings of fact for clear error and its conclusions of law de novo. Rembert v. AT & T Univ. Card Serv. (In re Rembert), 141 F.3d 277, 280 (6th Cir. 1998). A factual finding is clearly erroneous only when the reviewing court is left with the definite and firm conviction on the entire evidence that a mistake has been made. Id.

II. ANALYSIS

A. Proficient's "New Value" Defense

Proficient raised as its principal statutory defense to the preference action that Proficient provided "new value" to PRG in the form of ongoing inventory in return for PRG's pre-petition payments. Proficient challenges the Bankruptcy Court's holding that satisfaction of Proficient's reclamation claim in the amount of $540,000 precluded Proficient's "new value" defense to that amount.

The trustee in bankruptcy may recover for the benefit of all creditors those transfers made by the debtor within ninety days of bankruptcy which have the effect of preferring one creditor over another. 11 U.S.C. §§ 547, 550. The trustee carries the burden of proof on all elements of a preference listed in § 547(b). 11 U.S.C. § 547(g). The preference defendant may raise one or more of eight statutory defenses, which are listed in § 547(c), and the preference defendant carries the burden of proof on each defense. 11 U.S.C. § 547(g).

The statutory defense found in section 547(c)(4) is referred to as the "subsequent advance rule." Waldschmidt v. Ranier (In re Fulghum Constr. Corp.), 706 F.2d 171, 172 (6th Cir.1983). This statutory defense provides:

(c) The trustee may not avoid under this section a transfer —

....

(4) to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor —

(A) not secured by an otherwise unavoidable security interest; and ...