In re Sterling Optical Corp.

• Decision Date: 11 July 2007
• Docket Number: Bankruptcy No. 91-B-15944.,Adversary No. 95-8043A (MG).
• Citation: 371 B.R. 680
• 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

371 B.R. 680

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

Bankruptcy No. 91-B-15944.

Adversary No. 95-8043A (MG).

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

July 11, 2007.

COPYRIGHT MATERIAL OMITTED

Cole, Schotz, Meisel, Forman & Leonard, PA., by Laurence May, Frederick E. Schmidt, New York, NY, for Plaintiff Sterling Vision, Inc.

Corey E. Friedman, Esq., by Cory E. Friedman, New York, NY, for Defendant Fleet Business Credit Corporation, n/k/a BAL Global Finance, LLC.

MEMORANDUM DECISION AND ORDER GRANTING PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING DEFENDANT'S CROSS-MOTION FOR SUMMARY JUDGMENT

MARTIN GLENN, Bankruptcy Judge.

This matter is before the Court on a motion for partial summary judgment filed by the plaintiff Sterling Vision, Inc. ("Sterling Vision"). The defendant Sanwa Business Credit Corporation ("Sanwa")¹ filed a cross-motion for summary judgment. The Court has jurisdiction to hear this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334, and under the July 10, 1984 "Standing Order of Referral of Cases to Bankruptcy Judges" of the United States District Court for the Southern District of New York (Ward, Acting C.J.). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I).² Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409. For the reasons explained below, Sterling, Vision's motion for partial summary judgment is GRANTED and Sanwa's cross-motion for summary judgment is DENIED.

BACKGROUND

On November 4, 2003, Sterling Vision moved for partial summary judgment pursuant to Bankruptcy Rule 7056 on Count I of the Complaint seeking an order declaring that (1) Sterling Vision is the owner of certain franchisee notes subject to Sanwa's rights to be repaid in full and (2) Sterling Vision is entitled to recover the residual value of the franchisee notes.³ See Sterling Vision, Inc.'s Memorandum of Law in Support of Partial Summary Judgment at 1-2 (ECF # 43) (the "Motion"). Sterling Vision purchased most of the assets of Sterling Optical Corp. ("Optical" or "Debtor") in a § 363 sale in Optical's chapter 11 case. See Sale Order dated February 28, 1992 at 1-2 (the "Sale Order"). The purchased assets included Optical's rights, if any, arising from a letter agreement between Optical and Sanwa, dated November 29, 1990, and subsequently amended on several occasions (the "Letter Agreement"), and from certain franchisee notes payable by Optical's franchisees ("Franchisee Notes") and either pledged or sold by Optical to Sanwa pursuant to the Letter Agreement. The Franchisee Notes resulted from a financing arrangement Optical had with its franchisees. When Optical offered financing for franchisees to finance the construction of their stores, it took back notes from the franchisees, initially payable to Optical. Optical, in turn, funded its loans to franchisees through its financing arrangement with Sanwa, documented in the Letter Agreement.

The primary issue addressed by the parties in this adversary proceeding is the proper characterization of the transaction between Optical and Sanwa. The issue is hotly contested because the payments received by Sanwa under the Franchisee Notes ultimately exceeded the amount loaned (if it was a secured loan), or the purchase price Sanwa paid to Optical (if it was a sale).

Sterling Vision contends that Sanwa made a secured loan to Optical, secured by the Franchisee Notes receivables. See Motion at 12-13. If so, Sanwa would not be entitled to recover more than repayment of its loan, interest and authorized fees, and Sterling Vision as purchaser of Optical's assets would be entitled to recover the surplus proceeds, or so it claims. Sterling Vision contends that the Letter Agreement, despite the repeated use of language of "sale," has all of the indicia of a secured financing arrangement, the most important being that Optical retained all the risk associated with the underlying Franchisee Notes including the risk of nonpayment by the Debtor's franchisees. Id.

Conversely, Sanwa contends that it bought the Franchisee Notes outright for the amount it advanced and, therefore, it is entitled to everything collected on the Franchisee Notes — even if the amount Sanwa realized on the Franchisee Notes exceeded the amount it advanced to Optical. See Sanwa's Memorandum of Law in Opposition to Plaintiff's Motion for Partial Summary Judgment at 22 (ECF # 53) (the "Cross Motion"). Sanwa's primary contentions in opposition to the Motion and in support of its Cross Motion are that (1) the language of the Letter Agreement is entirely consistent with a sale of the Franchisee Notes; (2) Optical consistently maintained in its SEC filings that the transaction with Sanwa was a sale of the Franchisee Notes; and (3) the Letter Agreement was an executory contract that was rejected by the Debtor pursuant to a post-confirmation stipulation and Court order dated April 16, 1997 (the "Rejection Stipulation") and, therefore, Sterling Vision cannot now reap the benefits of the original transaction.

The adversary proceeding was transferred to me on December 14, 2006. A summary judgment hearing was held on January 24, 2007. During the hearing the Court asked if it even needed to address the issue whether this transaction should be characterized as a true sale or as secured financing because regardless of its character the bankruptcy estate may have had a right to recover the surplus proceeds as property of the debtor's estate.⁴ See Tr. (1/24/07) at 27. Paragraph 12 of the Letter Agreement provides that any funds in the "Reserve" account established pursuant to the Letter Agreement in excess of the funds needed for the Debtor to satisfy its repurchase obligations (primarily when franchisees defaulted on the Franchisee Notes) would be remitted to the Debtor in the absence of a default by Optical. See Letter Agreement at ¶ 12. Thus, in the absence of default by Optical, Optical had a right to recover any surplus funds after Sanwa recovered the amount of its advances, interest and authorized fees. As explained below, the parties dispute whether the right to recover any surplus funds survived Optical's default and rejection of the Letter Agreement, and whether Optical's right to recover the surplus, if it existed, was transferred to Sterling Vision pursuant to the Sale Order. The Court directed the parties to file supplemental briefs addressing several questions, including whether the right to recover any surplus was property of the estate under § 541(a) of the Bankruptcy Code at the date of the bankruptcy filing. See Tr. (1/24/07) at 104.

On February 26, 2007, the parties filed their supplemental briefs. Sanwa reiterated its position that the Letter Agreement was an executory contract, see Sanwa's Supplemental Brief at 2 (ECF # 69), and that Optical's rejection of the Letter Agreement pursuant to the Rejection Stipulation relieved Sanwa of any future obligation to pay surplus proceeds to Optical. Id. at 7-9. Sanwa contends that the bankruptcy estate's only legal or equitable interest in the Letter Agreement was the right to assume, or assume and assign the agreement. Id. at 9-11. Since Optical rejected the Letter Agreement, Sanwa asserts, the agreement was materially breached by Optical and any right to the surplus money in the reserve account was "forfeit[ed]". Id.

Sterling Vision contends that regardless whether the transaction embodied by the Letter Agreement was a secured financing transaction or a true sale, the clear and unambiguous language of the Letter Agreement provided that the Reserve would be released to the Debtor if and when Sanwa received the contracted-for amount from collections on the Franchisee Notes. See Sterling Vision's Supplemental Brief at 7 (ECF # 67). Sterling Vision further contends that nowhere in the Letter Agreement is there a clear and express statement that Sanwa would be entitled to retain all monies received from the Franchisee Notes if the Debtor breached the agreement after Sanwa received payment in full. Id.

DISCUSSION

I. Standard for Summary Judgment

Rule 7056 of the Federal Rules of Bankruptcy Procedure adopts Rule 56 of the Federal Rules of Civil Procedure, which provides that a party is entitled to summary judgment if the record demonstrates that "there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56. Summary judgment may be granted only if there exists no genuine issue of material fact that would permit a reasonable jury to find for the nonmoving party. Anderson v. Liberty Lobby Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A fact is material if it "might affect the outcome of the suit under governing law." Id. at 248, 106 S.Ct. 2505 (1986).

On a motion for summary judgment, the moving party has the burden of demonstrating the absence of any genuine issue of material fact, and all inferences to be drawn from the underlying facts must be viewed in the light most favorable to the party opposing the motion. Id. at 249, 106 S.Ct. 2505; Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970); U.S. v. Certain Funds on Deposit in Scudder Tax Free Inv. Account No. 2505103, 998 F.2d 129, 131 (2d Cir.1993). Once the moving party has made an initial showing that there is no evidence to support the nonmoving party's case, the party opposing the motion must come forward with competent summary judgment evidence of the existence of a genuine issue of fact. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).

Courts apply the same standards when considering cross-motions for summary judgment as are used for individual motions for summary judgment. In re Worldcom, Inc., 361 B.R. 675, 681 (Bankr. S.D.N.Y.2007) (citing Heublein, Inc. v. United...