In re Specialty Products, Inc.

• Court: U.S. Bankruptcy Court — Northern District of Georgia
• Writing for the Court: W. HOMER DRAKE
• Citation: In re Specialty Products, Inc., 37 B.R. 880 (Bankr. N.D. Ga. 1984)
• Decision Date: 14 March 1984
• Docket Number: Bankruptcy No. 82-00192N,Adv. No. 83-0110N.
• Parties: In re SPECIALTY PRODUCTS, INC., Debtor. John GLUCKLIN, et al., As the Official Creditors' Committee of Specialty Products, Inc., Plaintiff, v. Walter L. ROSS, Lancaster Colony Corporation and Specialty Products, Inc., Defendants.

37 B.R. 880 (1984)

In re SPECIALTY PRODUCTS, INC., Debtor John GLUCKLIN, et al., As the Official Creditors' Committee of Specialty Products, Inc., Plaintiff, v. Walter L. ROSS, Lancaster Colony Corporation and Specialty Products, Inc., Defendants.

Bankruptcy No. 82-00192N, Adv. No. 83-0110N.

United States Bankruptcy Court, N.D. Georgia, Newnan Division.

March 14, 1984.

Donald M. Sunshine, Sunshine, Slott & Sunshine, P.C., New York City, for plaintiff.

Edward O. Howard, Howard, Holland & Rhone, New York City, for Walter L. Ross.

Frank C. Dunbar, III, Murphey, Young & Smith, Columbus, Ohio, for Lancaster Colony Corp.

Wayne H. Lazarus, William K. Carmichael, Stokes, Lazarus & Watson, Atlanta, Ga., for Specialty Products, Inc.

ORDER

W. HOMER DRAKE, Bankruptcy Judge.

The Official Creditors' Committee of Specialty Products, Inc. (hereinafter referred to as the "Committee"), John Glucklin, et al., commenced the above-referenced adversary proceeding on June 6, 1983. Answers were timely filed by each of the above-named defendants: Specialty Products, Inc. ("Specialty Products"), the debtor herein; Lancaster Colony Corporation ("Lancaster Colony"); and Walter L. Ross ("Ross"). Ross joined a counterclaim with his July 8, 1983 answer. This matter is before the Court on the motion by the Committee to dismiss the said counterclaim.

The background of this case is as follows: On May 20, 1982, Specialty Products filed its voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code. At all times relevant to this proceeding, Ross was and is the President and sole shareholder of Specialty Products. Pursuant to Bankruptcy Code § 1102(a)(1), the Court appointed John Glucklin, et al. as members of the Committee. During the course of the bankruptcy proceeding, the assets of Specialty Products were sold to Lancaster Colony. The plan of reorganization effectuates a distribution to creditors of the proceeds from this sale. The instant adversary action challenges the propriety of certain cash payments and other monetary consideration flowing to Ross' benefit pursuant to the terms negotiated by Ross and Lancaster Colony in conjunction with the sale of assets by the debtor.

To summarize the Committees' complaint, the Committee alleges that Ross negotiated for Lancaster Colony to make certain payments and extend certain benefits to him, individually, in exchange for Ross' efforts to gain the approval of this Court for the contemplated sale of assets to Lancaster Colony. The Committee contends that, had these monies and benefits not been diverted to Ross in his individual capacity, Lancaster Colony would have increased its bid for the assets of Specialty Products by a corresponding amount. Accordingly, a higher pay-out would have been realized by the creditors of Specialty Products.

The purchase price for the assets of Specialty Products, less certain cash items and causes of action, was $5,854,000.00. This purchase price was approved by the Court on September 17, 1982. The Committee now contends that the creditors of Specialty Products would have realized approximately $7,000,000.00 absent Ross' alleged conflict of interest during sales negotiations.

The Committee argues that Ross violated his fiduciary duty to creditors as President, director and sole shareholder of Specialty Products. The specific amounts for which recovery is sought from Ross and/or Lancaster Colony include approximately $49,000.00 in pre-petition and post-petition transfers made by Specialty Products to Ross in the nature of fraudulent conveyances; $6,960.00 in automobile lease payments made by Lancaster Colony on two automobiles driven by Ross and his family; $22,884.00 constituting the pro rata portion of the annual salary paid by Lancaster Colony to Ross for the period of time from the effective date of the sale of assets until December 31, 1982; $360,000.00, representing an annual consulting fee and covenant of noncompetition in the amount of $40,000.00 per year for the years 1983-1991; and $300,000.00 approximating the amount of personal guaranties given by Ross on corporate debts for which Lancaster Colony has agreed to hold Ross harmless.

Ross' counterclaim refutes the charge that his conduct did not comport with his fiduciary duties. Ross alleges that the complaint was filed without the concurrence of either Specialty Products or the Committee. Rather, Ross maintains that the adversary action was brought by certain members of the Committee for the purpose of causing harassment to and attempted extortion from Ross and Lancaster Colony. The counterclaim seeks $2,000,000.00 in compensatory damages for harm caused to Ross' personal, professional and business reputation. In addition, Ross requests that his costs and expenses incurred in connection with responding to and defending against the complaint be borne by the Committee. Finally, the counterclaim prays that the Court disallow payment from the funds of Specialty Products any administrative claim for expenses and attorney's fees arising from prosecution of the complaint by the Committee.

The Committee has moved under Rule 12(b)(6) of the Federal Rules of Civil Procedure, applicable to this proceeding by Bankruptcy Rule 7012, to dismiss the counterclaim for failure to state a cause of action upon which relief can be granted. A motion to dismiss may be used to test the sufficiency of a counterclaim. Waldes Kohinoor, Inc. v. Stabile, 140 F.Supp. 916 (S.D.N.Y.1956). The allegations in the counterclaim are to be taken as true for purposes of a motion to dismiss the counterclaim. Walker Process Equip. v. Food Mach. & Chem. Corp., 382 U.S. 172, 86 S.Ct. 347, 15 L.Ed.2d 247 (1965). The Court stated in Deloach v. Crowley's, Inc., 128 F.2d 378, 380 (5th Cir.1942) that:

A petition may be dismissed on motion if clearly without any merit; and this want of merit may consist in an absence of law to support a claim of the sort made, or of facts sufficient to make a good claim, or in the disclosure of some fact which will necessarily defeat the claim.

In order to facilitate a decision on the merits, pleadings are to be liberally construed. Heyward v. Public Housing Adm., 238 F.2d 689 (5th Cir.1956); Fed.R.Civ.P. 8(f). The general rule for evaluating the sufficiency of a complaints was adopted by the Supreme Court in Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957):

In appraising the sufficiency of the complaint, we follow, of course, the accepted rule that a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.

Ross' counterclaim asserts essentially two distinct claims, one in tort for abuse of process, malicious use of process or malicious prosecution; and one in contract apparently alleging a breach and claiming damages under O.C.G.A. § 13-6-11. The Court undertakes to analyze the elements of each of these theories of recovery before examining Ross' counterclaim to determine whether it is facially sufficient under the aforementioned standard governing a Rule 12(b)(6) motion to dismiss.

A relevant discussion of the various tort theories raised in Ross' counterclaim is provided in U.S. v. Chatham, 415 F.Supp. 1214 (N.D.Ga.1976):

Under Georgia Law, there is a fine, but nevertheless recognizable distinction between causes of action for abuse of process, malicious use of process, and malicious prosecution. Carl v. Hansbury, 67 Ga.App. 830, 833, 21 S.E.2d 302 (1942). The gravamen of the defendant\'s counterclaim is his assertion that the instant action ... was brought without probable cause. Under the technical distinctions of Georgia law, such an allegation would more properly be an ingredient in a cause of action for malicious use of process or malicious prosecution ... since in an action for abuse of process it is unnecessary to allege want of probable cause, Atlantic Coastline R. Co. v. Inabinette, 32 Ga.App. 246, 122 S.E. 902 (1924), nor is it incumbent upon the claimant to show that the previous criminal action was terminated in his favor. I.C. and J.C. Collier, Inc. v. Buice, 36 Ga.App. 198, 136 S.E. 287 (1927). The two major elements supporting a claim for abuse of process, existence of an ulterior purpose and an act in the use of process not proper in the

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