In re Sterling Optical Corp.

• Decision Date: 13 August 2003
• Docket Number: Bankruptcy No. 91-15944 (REG).,Adversary No. 95-8043.
• Citation: In re Sterling Optical Corp., 302 B.R. 792 (Bankr. S.D.N.Y. 2003)
• Parties: In re STERLING OPTICAL CORP., Debtor. Sterling Vision, Inc., Plaintiff, v. Sterling Optical Corp. and Fleet Business Credit Corporation, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

302 B.R. 792

In re STERLING OPTICAL CORP., Debtor Sterling Vision, Inc., Plaintiff, v. Sterling Optical Corp. and Fleet Business Credit Corporation, Defendants.

Bankruptcy No. 91-15944 (REG).

Adversary No. 95-8043.

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

August 13, 2003.

COPYRIGHT MATERIAL OMITTED

Angel & Frankel, P.C., by Bruce Frankel, Leonard H. Gerson, New York City, for Sterling Vision, Inc.

Cory E. Friedman, by Cory E. Friedman, New York City, for Fleet Business Credit Corporation.

DECISION AND ORDER ON SUBJECT MATTER JURISDICTION

ROBERT E. GERBER, Bankruptcy Judge.

In this adversary proceeding under the umbrella of a case under chapter 11 of the Bankruptcy Code — seeking a determination as to the entitlement to receivables that are asserted to have been property of the debtor that was sold incident to a Bankruptcy Code section 363 sale in the umbrella chapter 11 case — defendant Fleet Business Credit Corp. ("Fleet") moves, pursuant to Fed.R.Civ.P. 12(b)(1) and (h), made applicable to adversary proceedings under Fed. R. Bankr.P. 7012(b), to dismiss for lack of subject matter jurisdiction.¹ As the Court determines that at the time the complaint was filed, it had subject matter jurisdiction under each of the "arising under," "arising in" and "related to" prongs of the relevant jurisdictional statute, 28 U.S.C. § 1334 ("Section 1334"), the motion is denied.

Facts

While the ultimate matters to be determined (as to whether the receivables in question were property of the debtor and conveyed in the section 363 sale) are of course hotly disputed, the facts relevant to this determination — principally those defining the nature of the controversy to be determined and the historic facts in connection with the parties' dispute — are not.

Background

Plaintiff Sterling Vision, Inc ("Vision") — not to be confused with the debtor Sterling Optical Corp. ("Optical") — brought this adversary proceeding against defendants Fleet, as the successor to Sanwa Business Credit Corp. ("Sanwa," referred to in the Complaint as "SBCC"),² and Optical. Vision,³ which purchased the business of Optical in a section 363 sale in Optical's chapter 11 case, seeks a declaratory judgment that property of the Optical estate — part of the assets Vision had so purchased from Optical — included the receivables associated with certain "Franchisee Notes," originally payable to Optical by franchisees operating vision centers, to which Sanwa was asserting a competing claim.⁴

Sanwa advanced funds to Optical, pursuant to a letter agreement between Sanwa and Optical dated as of November 29, 1990, as thereafter amended (as amended, the "Sanwa Letter Agreement"), and depending on one's point of view, either made a secured loan to Optical, secured by the Franchisee Notes receivables (in which case Sanwa would be entitled to repayment of its loan, interest and authorized fees, but no more than that) or bought the Franchisee Notes outright for the amount it advanced (in which case it would be entitled to everything realized on the Franchisee Notes — even if, as is apparently the case, the amount Sanwa realized on the Franchisee Notes substantially exceeded the amount Fleet advanced).⁵ Which point of view should be taken is the underlying issue in the controversy. As is apparent from the foregoing, while Optical, the seller-counter-party in the section 363 sale to Vision, was the original entity which would have the competing claim to the excess receivables, Optical's business was sold to Vision, and with it, any rights Optical had. This litigation is now a litigation between the two entities asserting a claim to the Franchisee Notes, Vision and Sanwa.

Debtor Optical filed a voluntary petition under chapter 11 of the Code on December 31, 1991. Optical's financial condition was such that it did not have the luxury of disposing of its business under a chapter 11 plan, and as a result, its business was sold in a section 363 sale in the early months of the Optical chapter 11 case. The section 363 sale was effected pursuant to an Asset Purchase Agreement, dated February 28, 1992 (the "Asset Purchase Agreement"), for a sale of substantially all of the assets of Optical. After Vision submitted the highest and best bid at an auction, Vision was found by this Court's predecessor, Hon. James L. Garrity, to have been the successful bidder. Judge Garrity approved the sale to Vision by an order also dated February 28, 1992 (the "Sale Approval Order"), under, inter alia, section 363.

Under the Asset Purchase Agreement, included in the assets acquired by Vision were "all of Seller's [i.e., Optical's] rights with respect to all franchise notes, including Franchisee Notes that have been pledged (or `sold') in connection with the Bank Debt...." Asset Purchase Agreement Section 1(a)(x). It is undisputed that the "Bank Debt" refers to debt to Sanwa. In other words, if Optical had the rights in those notes, it conveyed them to Vision, but whether or not Optical had any such rights remains a matter of debate between Vision and Sanwa.

Vision contends that although as of the date of filing of Optical's chapter 11 petition, Sanwa had not yet been repaid, the amount outstanding on the Franchisee Notes was more than sufficient to pay Sanwa in full, with interest, and that after the commencement of this adversary proceeding, Sanwa received the full return on its investment, with interest, and much more. The "much more" that is asserted to have been paid to Sanwa represents the residual value of the Franchisee Notes, which, according to Vision, belongs to Optical, and which was part of the assets Vision purchased under the Asset Purchase Agreement and Sale Approval Order.

Upon Optical's motion for approval of the 363 sale of its assets to Vision, Vision asserted, consistent with its position now, that the Franchisee Notes were assets of Optical, subject to sale. But Sanwa asserted that the Franchisee Notes belonged to it, not Optical, and that Optical could not sell what it did not own and had no interest in. At the hearing on the motion, Fleet sought clarification that the Franchisee Notes could be sold by Optical only to the extent that Optical had any interest in them. Apparently all parties agreed that this was the case, but whether or not Optical then had an interest in them was not judicially determined at that hearing, and the matter was left for another day. Now that the "other day" has come, Sanwa contends that that this Court lacks the subject matter jurisdiction to make the determination the Court then deferred — a position that, if upheld, would effectively give Sanwa unchallenged ownership of the Franchisee Notes.

The Asset Purchase Agreement and Sale Order

The Asset Purchase Agreement was incorporated by reference into the Sale Order. It provided, in relevant part:

Subject to the terms and conditions hereof, on the Closing Date ... Seller [Optical] will sell, convey, transfer and deliver to Buyer [Vision], and Buyer will purchase from Seller, the Business, free and clear of Encumbrances (as defined below) and claims ... including, without limitation, the following (collectively, the "Acquired Assets"):

...

(x) all of Seller's rights with respect to all franchisee notes, including franchisee notes that have been pledged (or "sold") in connection with the Bank Debt (as defined below)....

Asset Purchase Agreement Section 1(a).

The Asset Purchase Agreement further provided:

Buyer is hereby authorized to negotiate with each of CIT, Sanwa and GECC (collectively, the "Lenders") with respect to restructuring the terms of Seller's outstanding indebtedness to each of the Lenders which is secured by notes payable to Seller issued by Seller's franchisees (such indebtedness, other than Seller's indebtedness to CIT with respect to equipment leases, being hereinafter referred to as the "Bank Debt"). Buyer shall use reasonable efforts to convince the Lenders to release their claims against Seller prior to or on the Closing Date, but Buyer shall have no obligation to assume any of the Bank Debt. Buyer hereby acknowledges that the provisions of this Section 1(i) shall not authorize Buyer to enter into any binding arrangements with the Lenders on Seller's behalf without Seller's express written consent.

Asset Purchase Agreement Section 1(i). It continued, in that same lengthy paragraph:

For all purposes of this Agreement, the Bank Debt shall be deemed to be secured indebtedness of Seller and the franchise notes "sold" to the Lenders pursuant to the agreements evidencing the Bank Debt shall be treated as assets of Seller (and thus to be transferred to Buyer as part of the Acquired Assets) pledged to secure such Bank Debt, notwithstanding the fact that in certain cases such agreements purport to involve a sale of assets to the Lenders. The Acquired Assets include Seller's rights with respect to the franchisee notes referred to in Section 1(a)(x). Buyer agrees that the franchisee notes and other assets included in the Acquired Assets that are collateral for (or were "sold" in connection with) the Bank Debt shall remain subject to the liens and claims of the Lenders arising under the agreements evidencing the Bank Debt.

Id. (emphasis added).

The language of the Asset Purchase Agreement is clear that, as between Optical and Vision, the understanding was that the Franchisee Notes to be sold to Vision were receivables of the Optical estate, subject to a security interest in favor of Sanwa (that would have to be satisfied, and as to which the Franchisee Notes would remain subject). But this understanding would not be binding upon Sanwa until and unless a court made an appropriate determination, before which Sanwa would have notice and opportunity to be heard, as to the correctness of that understanding.

As noted, Sanwa contended, at the time, that Optical lacked the interest in the Sanwa notes receivable to sell, and presumably as a consequence of a Sanwa...