In re STN Enterprises, Inc.

• Decision Date: 07 May 1987
• Docket Number: Bankruptcy No. 84-98.
• Court: U.S. Bankruptcy Court — District of Vermont
• Parties: In re STN ENTERPRISES, INC., d/b/a Atwater Arms, Debtor. UNSECURED CREDITORS COMMITTEE OF DEBTOR, STN Enterprises, Inc., on Behalf of STN ENTERPRISES, INC., Plaintiff, v. Janice NOYES, Walter O. Noyes,[1] Jr., John Wilkinson, and Edgar Pierce, Defendants.

73 B.R. 470 (1987)

In re STN ENTERPRISES, INC., d/b/a Atwater Arms, Debtor.

UNSECURED CREDITORS COMMITTEE OF DEBTOR, STN Enterprises, Inc., on Behalf of STN ENTERPRISES, INC., Plaintiff, v. Janice NOYES, Walter O. Noyes,¹ Jr., John Wilkinson, and Edgar Pierce, Defendants.

Bankruptcy No. 84-98.

United States Bankruptcy Court, D. Vermont.

May 7, 1987.

COPYRIGHT MATERIAL OMITTED

J. Canney, Carroll, George & Pratt, Rutland, Vt., for debtor-in-possession (DIP).

R. Hull and W. Dagger, Jr., Dick, Hackel & Hull, Rutland, Vt., for defendant John Wilkinson (Wilkinson).

T. Maikoff, Rutland, Vt. and D.W. Goodrich, of Donovan & O'Connor, Adams, Mass., for defendant Janice Noyes (Noyes).

J. Meyers, White River Junction, Vt., for plaintiff Unsecured Creditors Committee (Committee).

MEMORANDUM OPINION AND ORDER DETERMINING JURISDICTION AND DENIAL OF MOTION TO DISMISS

FRANCIS G. CONRAD, Bankruptcy Judge.

INTRODUCTION

This proceeding was remanded by the Second Circuit to the United States District Court, Franklin S. Billings, Jr., Judge, on December 26, 1985. Judge Billings then entered an "ORDER OF REFERRAL" on February 10, 1986, to this Court.²

On remand, the Second Circuit instructed, inter alia, this Court³ to make a threshold inquiry as to whether the Unsecured Creditors Committee, (hereinafter referred to as Committee):

"Presents a colorable claim or claims for relief that on appropriate proof would support a recovery, ... In order to decide whether the debtor unjustifiably failed to bring suit so as to give the creditors\' committee standing to bring an action ... the court must also examine ... whether an action asserting such claim(s) is likely to benefit the reorganization estate."

Unsecured Creditors Committee of Debtor STN Enterprises, Inc. v. Noyes (In re STN Enterprises), 779 F.2d 901, 905 (2d Cir.1985). (Citations omitted).

On May 29, 1986, this Court held a preliminary evidentiary and oral arguments hearing on the issue of whether the Committee had presented a "colorable" claim or claims that, on appropriate proof, would support a recovery:

"Of course, if the creditor\'s committee represents that its fee arrangement will in no event impose a net burden on the bankruptcy estate (because the committee will pay the fee and seek reimbursement only out of any recovery), then the preliminary inquiry can be limited to ascertaining whether the proposed lawsuit has a colorable basis on which to proceed."

In re STN Enterprises, supra, 779 F.2d 901, 906 (2d Cir.1985).⁴

We granted the Committee leave to institute this adversary proceeding "Against Janice Noyes and others," by our Order dated May 29, 1986, after argument and preliminary evidence, including:

"We heard credible evidence of the accountant and it is clear that some money was diverted from the debtor corporation. To whom, or where, the funds went should be left to an evidentiary trial on the merits."

Unpublished Order Granting Unsecured Creditor's Committee Leave to Institute Adversary Proceedings Against Janice Noyes & Others, Case No. 84-98, Francis G. Conrad, B.J., Adv. Proc. No. 86-44, dated May 29, 1986, at page 2.

We also relied, inter alia, upon the representations of debtor's counsel to conclude that the debtor failed to pursue this adversary proceeding because:

"Your Honor, at the request of the president (John Wilkinson-Defendant) of the corporation (debtor) back in April of 1985, we (J. Canney, Esq., attorney for DIP) reviewed this particular matter to sue Janice Noyes (wife/director of debtor and administratrix of Stephen Noyes\' estate which is now DIP\'s sole stockholder)⁵ in her capacity as a director. We made an investigation. We came to the conclusion that it would not be an appropriate action to bring. We have maintained that all along. We continue to maintain it."

May 29, 1986 Hearing Transcript, pages 71-72 (parentheticals supplied for clarity).

On October 9, 1986, the Committee filed, inter alia, a nine (9) count complaint against Defendant Noyes⁶ and a two (2) count complaint against Defendant Wilkinson to recover preferential payments, preferential transfers, fraudulent conveyances, and for damages, pursuant to 28 U.S.C. §§ 1334, 151, and 157.

On October 28, 1986 and November 17, 1986, Janice Noyes and John Wilkinson, respectively, filed their answers and motions to dismiss the Committee's complaint under Rules of Bankruptcy Practice and Procedure Rule 7012(b).⁷ Both Noyes and Wilkinson request us to dismiss the Committee's complaint on two grounds: (1) the bankruptcy court lacks subject matter jurisdiction over the complaint; and, (2) the committee's complaint fails to state a claim upon which relief can be granted.

Additionally, Defendant Noyes challenges the Committee's standing to prosecute the proceeding on behalf of the debtor. Alternatively, if this Court determines the complaint to be a "core" matter under 28 U.S.C. § 157(b)(2)(O), then Janice Noyes claims that 28 U.S.C. § 157 violates the United States Constitution because it deprives her from having an Article III judge preside over a suit allegedly governed strictly by state law.⁸

We deny the Defendants' motions because we hold that this Court has subject matter jurisdiction; the power to enter a final order; and the Committee has standing to prosecute this adversary proceeding under its "colorable" showing that the debtor unjustifiably failed to assert claims that may benefit the estate. Finally, we hold the Committee's averments are sufficient to withstand Defendants' motions to dismiss for failure to state a claim upon which relief may be granted because it does not appear to a certainty that the Committee is entitled to no relief under any state of facts which could be proven at trial.

BACKGROUND

STN, a dealer in antique firearms, was incorporated under Vermont law on August 6, 1982. Stephen T. Noyes, husband of Defendant Janice Noyes, was the sole stockholder, president, treasurer, and one of the two directors of STN Enterprises, Inc. (STN), the corporate debtor in possession, (DIP), until his presumed untimely demise in a plane crash on May 5, 1984. Defendant Noyes was and is the other director and secretary of the corporation.

As the Second Circuit noted in In re STN Enterprises, supra, the Committee's claims are based on the following facts:

"1. From October 8, 1982, to May 2, 1984, Stephen T. Noyes negotiated between $1.6 million and $2.1 million in checks on the STN account made out to "Cash," the use of which funds remains unaccounted for;⁹

2. During the year prior to Stephen T. Noyes\'s death he took $250,000.00 in salary from the corporation and his wife, at least for tax purposes, was credited with $30,000 in salary;

3. For all or a greater portion of this time, the precise time being unknown, the corporation was insolvent;

4. During the same period of time the Noyes\' home property, owned by them as a tenancy by the entirety, was increased in value, presumably from the funds mentioned in paragraphs 1 or 2 above, by way of installation of an electrical burglar alarm system and a swimming pool, and construction of a `plush\' showroom and an office;

5. Presumably also from the funds mentioned in paragraphs 1 and 2 above, Stephen Noyes bought life insurance in the amount of several hundred thousand dollars on his life, the beneficiary of which was his wife or a trust or trusts for her benefit;¹⁰ and

6. Again presumably from the aforementioned funds, a $70,000 debt to Mrs. Noyes\'s father was repaid in the year preceding the bankruptcy filing."

In re STN Enterprises, supra, 779 F.2d at 902-03 (2d Cir.1985).

In addition to the above claims, the Committee has alleged that Defendant Noyes, as director, secretary and bookkeeper of the debtor, knew or should have known of the detrimental effect these disbursements had on the corporation; that certain corporate records were unaccounted for; and that assets were sold for grossly inadequate consideration following Stephen Noyes' death.¹¹

After Stephen Noyes's death in May of 1984, Defendant Wilkinson became the president and director of debtor on or about May 21, 1984.¹² The Committee has asserted two counts against Defendant Wilkinson in his capacity as president and director of the debtor: 1. for his failure to locate, recover, or demand misappropriations or transfers without adequate consideration from Defendant Noyes; and, 2. for bringing suit against the debtor to recover a gun while receiving salary and expenses.¹³

Based on these allegations, the Committee makes the following legal claims against Defendants Noyes and Wilkinson:

1. Against Noyes as a director of the insolvent corporation for misfeasance, nonfeasance, or malfeasance in respect to the alleged waste of corporate assets, misappropriations, self-dealings, excessive salaries, transfers for inadequate considerations resulting in breach of fiduciary duties and negligence;

2. Against Noyes personally as either the recipient of fraudulent conveyance(s) or unjust enrichment by the transfers/conveyances made on the insurance and pension plan paid for out of an insolvent corporate funds; and

3. Against Wilkinson for his failure to prevent preferential payments or pursue corporate assets resulting in negligence and breach of fiduciary duties to the insolvent corporation, and for receiving, while a creditor with an adverse interest, salary and expenses as president and director of the debtor in derogation of 11 U.S.C. §§ 327(a) and 328(c).

DISCUSSION

A. SUBJECT MATTER JURISDICTION AND POWER TO ENTER A FINAL ORDER

A question to be resolved by us is whether and to what extent we have jurisdiction to adjudicate the merits of this adversary proceeding. We consider the Fed.Rules Civ.Proc. Rule 12(b)(1) motion to dismiss for lack of subject matter jurisdiction first, since if we grant the 12(b)(1) motion, the remaining defenses and objections would become moot. See, 5 Wright & Miller, § 548.

A Rule 12(b)(6) motion to dismiss for failure...