In re Rooster, Inc.
| Decision Date | 16 May 1991 |
| Docket Number | Bankruptcy No. 89-10737F,Adv. No. 90-0190F. |
| Citation | 127 BR 560 |
| Parties | In re ROOSTER, INC., Debtor. ROOSTER, INC., Plaintiff, v. RAPHAEL ROY, S.R.L., Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
COPYRIGHT MATERIAL OMITTED
Douglas N. Candeub, Adelman Lavine Gold and Levin, Philadelphia, Pa., for debtor/plaintiff, Rooster, Inc.
Paul B. Maschmeyer, Ciardi, Fishbone & DiDonato, Philadelphia, Pa., for defendant, Raphael Roy, S.R.L.
Rooster, Inc. ("Rooster"), the debtor, brought this adversary proceeding against the defendant, Raphael Roy, S.R.L. ("Raphael Roy") to recover two payments made by Rooster to Raphael Roy shortly before Rooster filed a voluntary petition in bankruptcy. Rooster is a Pennsylvania corporation formerly in the business of manufacturing men's neckties. It filed a voluntary petition in bankruptcy under chapter 11 on February 24, 1989. Raphael Roy — a subsidiary of a family business headed by the Giussani family — is an Italian entity in the business of manufacturing silk fabric for distribution to various producers, wholesalers and distributors. Raphael Roy had supplied fabric to Rooster for approximately ten years prior to its bankruptcy filing.
The crux of this dispute stems from a prepetition agreement entered into between the debtor and Raphael Roy. In connection with that agreement, the debtor tendered $22,137.00 to the defendant. The debtor now seeks recovery of that sum under a variety of legal theories. Raphael Roy opposes the relief sought and counters with its own assortment of theories. The various theories of both parties overlap in their discussions of setoff and the provisions of 11 U.S.C. §§ 524(a) and 553.
Without so concluding, I note that both parties consider this proceeding a core proceeding under 28 U.S.C. § 157(b). Whether this proceeding is in fact core, the representation of both parties that it is constitutes consent to my rendering a final judgment under 28 U.S.C. § 157(c)(2). Accord In re St. Mary Hosp., 117 B.R. 125, 131 (Bankr.E.D.Pa.1990). See 9 Collier on Bankruptcy, ¶ 7008.031, at 7008-8 (15th ed. 1990).
The following facts were established at trial.
As I noted earlier, the debtor was in the business of selling ties; Raphael Roy was in the business of supplying the material for such ties. Before October 1988, Rooster would order material from the defendant and would be obligated to pay for those goods within 90 days of its delivery. By October 1988, Rooster was indebted to Raphael Roy in the approximate amount of $300,000.00 due to its failure to pay for the fabric after delivery. Rooster was also indebted to other suppliers and feared that it would soon be unable to operate because no supplier would ship additional goods, or because one or more suppliers might attempt to execute on the debtor's assets.
To avoid creditor action and possibly cessation of operations, Rooster attempted to reach a compromise with all or virtually all of its significant creditors, including Raphael Roy. On October 18, 1988, a compromise with this particular creditor was signed. Ex. PX-6. Pursuant to its terms, the debtor agreed to repay its entire obligation to Raphael Roy in six installments over, roughly, a two year period. In return for this promised repayment, Raphael Roy agreed not to take any collection actions.
Furthermore, while this agreement was in force, this supplier agreed that it would sell additional fabric to Rooster. The compromise agreement provides that funds paid by Rooster to Raphael Roy for this new material would not be applied to the unpaid debt. In the event Rooster failed to pay any amount when due in accordance with the terms of the new agreement, however, the parties agreed that Raphael Roy would be free to collect the entire indebtedness owed to it by Rooster.
The agreement also provided that it was not binding on Rooster unless it could reach a similar agreement with at least 90% of its other trade creditors. Apparently, such additional compromises were reached for the debtor tendered to Raphael Roy the first installment payment due October 15, 1988. The second installment was not scheduled for payment until April 15, 1989 — which turned out to be due post-bankruptcy — and was not made, nor were any other payments on the outstanding debt tendered.
As already stated, the October 1988 agreement provided that Raphael Roy would sell new fabric to Rooster so long as Rooster now paid for the fabric before delivery. At trial, it was undisputed that this general prepayment provision was quantified by a later oral understanding which established the following schedule for prepayment of any new goods ordered. The debtor promised to tender 10% of the purchase price at the time it placed an order with the defendant. The debtor also promised to tender an additional 40% of the purchase price when Raphael Roy was ready to begin production of the fabric. The remaining 50% of the purchase price was to be tendered when the supplier was ready to ship the material.
In accordance with this new understanding, Rooster placed four purchase orders with Raphael Roy beginning October 24, 1988 and continuing through November 7, 1988. Exhibits PX-1 through PX-4. The total price for these four orders was $44,272.00. On December 6, 1988, Rooster wire transferred $4,429.00 to Raphael Roy. On January 3, 1989, the debtor sent Raphael Roy an additional $17,708.00, bringing the total prepayment sent to $22,137.00 — which is 50% of the four orders — and which is the sum in controversy now.
It is undisputed that Raphael Roy sent invoices to Rooster confirming the purchase orders and stating that the goods would be shipped on February 10, 1989. Thus, February 10, 1989 was the date by which the balance of the purchase price was to be sent. However, Rooster did not tender the balance owed on the goods by that date and, as a result, Raphael Roy did not ship them.
Mr. Egidio Giussani, who is a member of the controlling family which owns and operates the defendant, testified that sometime in March of 1989 Raphael Roy made a further demand upon Rooster for the balance of the payment and received no response. Mr. Richard Aron1, chairman of Rooster for twelve years, made subsequent efforts to receive the goods ordered in the four purchase orders by both telephoning and writing to Raphael Roy on June 15, 1989 and July 14, 1989 respectively. Exhibit PX-7(a) and (b). Raphael Roy did not respond to either request.2
Shortly before this July 1989 letter from Mr. Aron, Raphael Roy had reached an agreement with a Canadian company called Watson Bros. to purchase the fabric ordered by Rooster. That transaction was completed on July 26, 1989 when the goods were shipped and Raphael Roy was paid by Watson Bros.
Giussani did not recall the amount of payment received by Watson Bros. as a dollar amount although he did recall that it was greater than the 50% owed by the debtor and less than the original purchase price agreed to by Rooster. N.T. 103-05.3 Giussani also stated that in selling the fabric to Watson Bros. the defendant incurred between $1,000.00 and $2,000.00 to store the fabric from the time it was ready for shipment in February to the time it was actually sold. He further stated that the defendant "lost" more than $10,000.00 "to make the new screen for Bill Blass for the orders in question." N.T. at 113.4
Insofar as the accounting procedures used by the defendant in connection with the Rooster account are concerned, Giussani testified that Raphael Roy deposited the prepayment from Rooster in its general bank account and commingled these funds with other funds on deposit; moreover, he stated that the deposit payment is still listed in its records. N.T. 117, 132-33.
The debtor filed a bankruptcy statement of financial affairs on March 22, 1989. Ex. PX-8. Schedule A-3 lists Raphael Roy as holding an unsecured claim in the amount of $283,054.00. Raphael Roy was appointed by the United States Trustee to the Official Committee of Unsecured Creditors on March 20, 1989, due to its large unsecured claim. Exhibit PX-12. Schedule B-2(b) of the bankruptcy statement lists the sum of $65,289.00 as property of the debtor on deposit with Raphael Roy for the purchase of materials.5
The debtor filed a proposed plan of reorganization on May 24, 1989, Ex. PX-9, and shortly thereafter, a disclosure statement. Ex. PX-10. The proposed plan, inter alia, called for the debtor to liquidate its assets and to pay all unsecured creditors 20% of their allowed unsecured claims. Shareholders of the debtor were to retain their shareholder interests. In the section of the disclosure statement entitled "Means for Execution of the Plan", the debtor again mentions among its various assets, "security deposits paid for certain additional piece goods." Ex. PX-10, at 13. The debtor's plan of reorganization was confirmed on November 1, 1989 with creditor assent. This adversary proceeding was then commenced on March 28, 1990.
The parties raise a plethora of issues which make resolution of this dispute more complicated than it need be. In particular, they both address the issue of the proper manner to interpret harmoniously the provisions of 11 U.S.C. §§ 524(a)(2) and 553. Raphael Roy argues that it setoff the prepetition deposit in question against the debtor's prepetition obligation only after the debtor's plan was confirmed. Since 11 U.S.C. § 1141(d)(1)(A) provides that the entry of the order of confirmation acts to discharge preconfirmation debts, see generally In re Chipwich, Inc., 64 B.R. 670, 677 (Bankr.S.D.N.Y.1986), and since 11 U.S.C. § 362(c)(2)(C) states that the automatic stay ends upon the granting of a discharge, the defendant is therefore asserting that the setoff occurred postdischarge without violating any provision of the bankruptcy stay.
The debtor asserts that a creditor may not setoff a claim after discharge,...
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