In re Sendmygift.Com, Inc.
| Decision Date | 03 July 2002 |
| Docket Number | No. 00-35021.,00-35021. |
| Citation | 280 B.R. 667 |
| Parties | In re SENDMYGIFT.COM, INC., Debtor. |
| Court | U.S. Bankruptcy Court — District of Minnesota |
Ralph V. Mitchell, Minneapolis, MN, for Steve & Charlene Houle, Jean Peterson, Jere & Suzanne Peterson, and Chad Lofton.
Ryan Burt, Minneapolis, MN, for Charles & Roxanne England and Peter & Linda Stencel.
This Chapter 11 case is before the Court on the Debtor's objections to the claims filed by certain of the Debtor's shareholders: Steve and Charlene Houle (claim no. 76), Jean Peterson (claim no. 77), Chad Lofton (claim no. 78), Jere and Suzanne Peterson (claim no. 79), Charles and Roxanne England (claim no. 52), and Peter and Linda Stencel (claim no. 88). The Debtor appears by its attorney, David Hoiland. The Houles, the Petersons, and Lofton appear by their attorney, Ralph V. Mitchell. The Englands and the Stencels appear by their attorney, Ryan Burt. Upon the memoranda and argument of counsel and the relevant portions of the file in this case, the Court makes the following memorandum decision.
The Debtor, SendMyGift.com, Inc., is a business corporation that filed a voluntary petition under Chapter 11 on December 20, 2000. Joseph Burnett was its original promoter; he is presently its sole employee, officer, and director. When Burnett organized the Debtor in 1998, his business plan was to establish a "dot-com company" to carry on retail, registry-based sales of jewelry and gifts through a site on the World Wide Web. The Debtor registered a domain name for a site and commenced development of a complex software platform to support its planned presence and operation on the Web.
To capitalize its startup, the Debtor raised approximately $5,000,000.00 in cash from individual investors; it also received in-kind contributions of real estate. The investors were issued shares of stock in the corporation. In consideration for the later issuance of another block of stock, the Debtor took an in-kind payment of another parcel of real estate, located in Rochester, Minnesota, on which was located a multi-unit housing development composed of former military barracks buildings. Ultimately, the Debtor had over 400 shareholders.
In mid-1999, the Debtor purchased a retail jewelry store on the downtown Minneapolis skywalk. Throughout 1999 and 2000, the Debtor operated this store and managed the Rochester apartment complex while it continued to develop its website. It also purchased a commercial office building in Burnsville, Minnesota, as a planned headquarters for the on-line business. By late 2000, however, it ran out of startup capital. Its business revenues were insufficient to fund the commencement of its Internet-based retail operation. Burnett hoped to stem the Debtor's foundering by using the proceeds of a planned sale of the Rochester real estate, but the sale fell through. After a secured creditor repossessed the jewelry inventory at the Minneapolis store, the Debtor filed its Chapter 11 petition.
Since its Chapter 11 filing, the Debtor has liquidated various parcels of real estate under court authorization, including the Burnsville and Rochester properties, and has paid the creditors that held liens against those properties. It holds the remaining proceeds on deposit pending the outcome of this case. The proceeds may be sufficient to enable the Debtor to pay all of its unsecured trade creditors in full, a rarity in a bankruptcy case.
The Debtor has retained ownership of its developed but still-unused software platform. Most recently, it contemplates the recovery of some value from it via the sale of non-exclusive licenses to use it. The Debtor has filed successive versions of a plan; proceedings on the approval of a disclosure statement are pending.
After this case was commenced, a number of the Debtor's shareholders filed proofs of claim under which they asserted a right to payment as holders of claims against the Debtor. Via a combined and very generic request for disallowance in full, the Debtor objected to these claims and others.
Of all of the affected shareholder-claimants, only two groups engaged counsel. They separately responded to the Debtor's objections: the Houles, Jean Peterson, Chad Lofton, and Jere and Suzanne Peterson on the one hand (collectively referred to as "the Houle/Peterson/Lofton group"), and the Englands and the Stencels on the other (collectively referred as "the England/ Stencel group").1 After an initial hearing and further scheduling by the Court, the issues implicated by the Debtor's objections have been narrowed, identified, and presented for decision.
The issue here is legal in character, the substantive consequence of the parties' posture in proceedings in this and other courts. As a result, the relevant "facts" are not historical in origin or nature; identifying them requires no more than a summary of the recitations in various court records.
The members of the Houle/Peterson/Lofton group filed their proofs of claim on May 15, 2001. All four proofs of claim recited the same basis for an unsecured claim: "Recission [sic] of stock purchase." All included copies of stock certificates naming the specific claimants. The amounts of the individual claims were stated.2 The signatory on all four proofs of claim was the legal counsel for the group's members.
It is undisputed that the members of the Houle/Peterson/Lofton group were shareholders of the Debtor as of the date of its Chapter 11 filing. Nothing in the record suggests that they had obtained a judgment for rescission or damages in a court proceeding against the Debtor, or had even commenced a lawsuit for such relief. It will be assumed for the purposes of this decision that none of the Houle/Peterson/Lofton group had obtained such an adjudication.
In their submissions here, however, the members of this group complain that agents and principals of the Debtor made fraudulent misrepresentations of fact to induce them to make their equity investments in the Debtor. They insist that the securities laws and the common law of fraud would entitle them to rescind their stock purchases or to recover money damages from the Debtor, were the Debtor not in bankruptcy.
In the second group, the Englands filed their proof of claim on April 27, 2001. They asserted a claim in the amount of $115,911.48, alleging that it arose on October 8, 1999, from "Securities Fraud/Common Law Fraud." On August 7, 2001, the Stencels filed a proof of claim with the same recitations, to assert a claim in the amount of $46,499.06.
In July 2000, the Englands and the Stencels had commenced suit against the Debtor, Burnett, and Brian Cox (the Debtor's former chief financial officer) in the Minnesota State District Court for the First Judicial District, Dakota County. The suit apparently sounded under the Minnesota state securities laws and common-law and equitable theories. Counsel entered an appearance on behalf of the Debtor in the action. Early on, the England/Stencel group made a Rule 36 request for admissions to Burnett and the Debtor. On February 22, 2000, the Dakota County District Court entered an order to deem admitted the fact averments in the request. By a separate order entered on the same date, it granted a money judgment against Burnett.
The Englands and the Stencels also moved for summary judgment against the Debtor, premised on the deemed admissions. That matter remained pending until May 22, 2001. On that date, the Dakota County District Court entered an order granting a money judgment against Cox. In the text of this order, the court acknowledged the Debtor's Chapter 11 filing. It directed that proceedings against the Debtor be held in abeyance pending a grant of relief from stay from this Court. The Englands and the Stencels have never requested such relief in this forum. Judgment has not been entered against the Debtor in the Dakota County District Court.3
In his original memorandum, the Debtor's counsel set forth the substantive basis for his client's objection to all of the claims filed by shareholders:
§ 510 of the Bankruptcy Code prohibits shareholders' claims from being granted the priority status of unsecured claims. Shareholders' claims should be treated, for purposes of any plan of reorganization, as shareholder claims, regardless of whether or not those shareholders made claims for securities fraud or the like.
It was not clear from this statement how the Debtor's position would translate into a final configuration of rights for the affected shareholders. Supplemental brief and oral argument has clarified the Debtor's position as follows: The claims asserted on the face of the shareholders' proofs of claim should be disallowed. Those parties would not be entitled to share pro rata with non-shareholder creditors that have general unsecured claims, when the Debtor distributes the funds it has accumulated. Rather, such shareholder-claimants would be relegated to a status equal to that of all of the Debtor's other shareholders — that is, they would "be granted the same priority as common stock" in the Debtor, left intact as holders of equity interests in the reorganized corporate entity.4
To some extent, this proposal finessed the shareholder-claimants' central point — that they had a continuing right under nonbankruptcy law to divest their equity positions and to be made whole in money for their investments, because they had been fraudulently induced to assume the equity positions in the first place. In its original memorandum, the Debtor seemed to recognize the point, when it stated that its plan would leave "shareholder rights and claims unimpaired" (...
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