In re Richton Intern. Corp.

• Decision Date: 16 July 1981
• Docket Number: 80 B 10375 and 80 B 10376.,Bankruptcy No. 80 B 10374
• Citation: 12 BR 555
• Parties: In re RICHTON INTERNATIONAL CORPORATION, also d/b/a Bond Street, Ltd., a division and Ronay, a division, Debtor. In re The RICHTON JEWELRY COMPANY, INC., formerly known as Coro, Inc., also d/b/a Aspen Skiwear, a division and the Richton Headwear Company, a division, Debtor. In re RICHTON SPORTSWEAR, INC., Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

12 B.R. 555 (1981)

In re RICHTON INTERNATIONAL CORPORATION, also d/b/a Bond Street, Ltd., a division and Ronay, a division, Debtor.

In re The RICHTON JEWELRY COMPANY, INC., formerly known as Coro, Inc., also d/b/a Aspen Skiwear, a division and the Richton Headwear Company, a division, Debtor.

In re RICHTON SPORTSWEAR, INC., Debtor.

Bankruptcy Nos. 80 B 10374, 80 B 10375 and 80 B 10376.

United States Bankruptcy Court, S.D. New York.

July 16, 1981.

Stroock, Stroock & Lavan, New York City, for debtors.

DeBevoise, Plimpton, Lyons & Gates, New York City, for Arthur Anderson & Co.

Adler, Pollock & Sheehan, Providence, R.I., for Koffler Corp.

Weil, Gotshal & Manges, New York City, for Bank Creditors.

Cole & Deitz, New York City, for Richton.

Gelberg & Abrams, New York City, for Creditors Committee.

MEMORANDUM OPINION

JOHN J. GALGAY, Bankruptcy Judge.

On March 18, 1980 Richton International Corporation (International), Richton Jewelry Company, Inc., (Jewelry) and Richton Sportswear, Inc., (Sportswear) each filed a petition for reorganization under Chapter 11 of the Bankruptcy Code. Pursuant to the provisions of Section 1108 of the Code each Debtor has continued to operate its business. On April 10, 1980 the United States Trustee appointed a single Unsecured Creditors' Committee to function in all three cases. On April 29, 1980, this Court entered an order directing joint administration of the International, Jewelry and Sportswear cases for procedural purposes. The issue now before this Court is whether these cases should be substantively consolidated so that a single plan of arrangement based on merged assets and liabilities may be filed, and a single disclosure statement, as required under Section 1125 of the Code, may be distributed to creditors.

The Debtors filed a notice of hearing dated June 16, 1981 which was duly served upon all creditors of these Debtors who had filed claims in these proceedings or who were listed in the books and records of these Debtors. Hearings on the application were held on July 9 and 13, at which time the Debtors presented their case, supported in their application by representatives of the Unsecured Creditors' Committee.

Although no opposition to the motion is currently pending, this Court is mindful of its duties to scrutinize carefully the evidence offered, In re Commercial Envelope Manufacturing Co., Inc., 3 BCD 647, 648 (S.D.N.Y.1977), as "consolidation in bankruptcy, in the form directed in this case, is no mere instrument of procedural convenience ... but a measure vitally affecting substantive rights." In re Flora Mir Candy Corporation, 432 F.2d 1060, 1062 (2d Cir. 1970). Based on my knowledge of these proceedings since the filings in March 1980 and on the testimony and exhibits produced at the hearings on July 9 and 13, this Court concludes that the requirements for substantive consolidation developed by the courts of this circuit have been satisfied, and that the application of the Debtors for an order consolidating the separate proceedings into a single proceeding thereby merging all assets and liabilities, and eliminating all intercompany obligations and guarantees is hereby granted.

International is a publicly held company whose stock was traded on the American Stock Exchange prior to the filing of International's petition. International owns all of the issued and outstanding stock of Jewelry and Sportswear. International is engaged, directly and through its subsidiaries and affiliates, including Jewelry and Sportswear, in the business of designing, manufacturing and marketing active sportswear, accessories and jewelry. The business activities of International and its subsidiaries and affiliates (collectively, the "Richton Group") are conducted in the United States and abroad. The Debtors constitute the United States portion of the Richton Group. According to the testimony of John K. Kabay, director, senior vice president and chief financial officer of International and vice president and board member of Sportswear and Jewelry, the Debtors have operated as a single business entity. Management of the business activities of the Debtors, and the Richton Group as a whole, is the province of International. The Chairman of the Board of Directors of International is the Chairman of the Board of Directors of Jewelry and Sportswear; International appoints the members of the Boards of Directors of Jewelry and Sportswear, all or a majority of whom are and were officers and/or directors of International. Also, International establishes the accounting and control systems for all its subsidiaries and affiliates, including Jewelry and Sportswear, and monitors their performance. See Transcript of the July 9 hearing at p. 37.

At regularly scheduled meetings of the Board of Directors of International matters pertaining to the operations and affairs of Jewelry and Sportswear were regularly discussed, acted upon and overall matters of policy for the entire Richton Group were considered and dealt with. In addition, significant operational and policy decisions respecting the Debtors were made and implemented by the management of International. July 9 transcript at p. 38. On the other hand, the Boards of Directors of Jewelry and Sportswear did not hold regular meetings. Matters such as adopting bank resolutions and granting authorization to enter into certain transactions, such as leases, were normally taken by action of the respective Board of Directors without a meeting. Id. at p. 40.

Prior to the date of filing of the Chapter 11 petitions, International controlled the flow of cash throughout the Richton Group. Whenever necessary, such as during periods when one Debtor was experiencing losses or when a Debtor was in an inventory build-up period, funds were shifted between the Debtors in order to provide the necessary sustenance for operations. In the case of Jewelry and Sportswear, without this influx of funds made possible by credit arrangements of International with the Bank Group and without advances from other affiliates, they could not have continued in business by virtue of the substantial losses suffered by Sportswear and Jewelry in recent years. This interdependence among the Debtors and their affiliates is reflected by the substantial amount of intercompany indebtedness existing at the time of the filing of the Chapter 11 petitions. Transcript of July 9 at p. 34.

The prepetition financial arrangements of the Debtors underscore the interdependence of the companies. A consortium of seven banks (the Bank Group) entered into a term loan agreement and a revolving credit agreement with International which downstreamed money from these borrowings to Sportswear and Jewelry. Jewelry and Sportswear issued notes for and, it is claimed, guaranties of the obligations of International under these loans. Transcript of July 9 at p. 44. Additionally, the loan agreements imposed restrictions on the rights of the subsidiaries to borrow money on their own. Transcript of p. 35. As a result, the debt to the Bank Group constitutes 75 percent of the total outstanding debt of these debtors. Transcript at p. 43.

Finally, the Debtors have filed consolidated federal tax returns, utilizing all procedures available for sheltering income including loss carrybacks and loss carryforwards. Financial statements, annual reports and reports to the Securities and Exchange Commission were also prepared and filed on a consolidated basis....