In re Swallen's, Inc.
| Citation | 205 BR 879 |
| Decision Date | 26 February 1997 |
| Docket Number | Bankruptcy No. 95-14476. |
| Parties | In re SWALLEN'S, INC., Debtor. |
| Court | United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Southern District of Ohio |
Thomas W. Coffey, Reuel D. Ash, Cincinnati, OH, for Debtor.
Donald J. Rafferty, Richard D. Nelson, Cincinnati, OH, for the UCC.
James R. Cummins, Kathryn K. Przywara, Kevin E. Irvin, Robert G. Sanker, Cincinnati, OH, for Debenture Class.
Robert A. Goering, Cincinnati, OH.
Steven E. Fox, New York City.
Timothy J. Hurley, Cincinnati, OH.
ORDER ON UCC MOTION TO STAY STATE COURT LITIGATION
Before the court is a motion by the Unsecured Creditors' Committee ("UCC") which has alternative objectives. Both objectives seek relief with regard to litigation currently pending in the Hamilton County Court of Common Pleas captioned Stelter et al. v. Swallen et al., Case No. A-96-01477 (hereafter "the Stelter litigation"). First, the UCC, in effect, seeks a declaration that the existing § 362 automatic stay with respect to the debtor in this bankruptcy case be extended to bar further prosecution of the Stelter litigation. In the alternative, the UCC seeks an injunction pursuant to § 105 of the Bankruptcy Code enjoining further prosecution of the Stelter litigation pending confirmation of a plan yet to be filed in this bankruptcy case. It is part of the recitation by the UCC in its motion that in such plan it will be seeking approval of a certain Settlement Agreement entered into between the UCC and the Swallen Family.1 The motion of the UCC is opposed by the plaintiffs in the Stelter litigation. (We will hereafter refer to such opponents as "respondents.") The UCC moved for an expedited hearing. That motion was granted, and the motion was heard on an expedited basis. The UCC and respondents appeared at and made presentations at the hearing.
This court has jurisdiction of this matter pursuant to 28 U.S.C. § 1334(b) and the General Order of Reference entered in this District. This is a core proceeding arising under 28 U.S.C. § 157(b)(2)(A) and (G).
At the hearing, the court expressed concern on several accounts. First, the need for an expedited hearing was questioned in view of the fact that the Stelter litigation has been in progress since March, 1996, and while the settlement by the UCC with the Swallen Family was formalized but a few weeks ago, it has been in the offing for some months. The court also expressed concern that the UCC was planning on deferring consideration of approval of the Settlement Agreement between the UCC and the Swallen Family until the time for confirmation of a yet to be proposed plan. That consideration was relevant to our present consideration because it is a condition precedent to effectiveness of the Settlement Agreement that the Stelter litigation be stayed pending confirmation of a plan framed to constitute approval of the Settlement Agreement.
Because of the foregoing concerns, the court announced two conclusions and holdings at the hearing. First, the court would not consider the merits of the motion for a § 105 injunction on the present motion, because F.R.B.P. 7016, upon which the UCC expressly relies in its motion, itself requires that such relief be sought through an adversary proceeding. That part of the motion of the UCC is therefore denied. Second, the court directed that the Settlement Agreement be the subject of a motion pursuant to F.R.B.P. 9019, and that such motion be brought before the court promptly. With these steps taken by the court, there remained then for consideration on the present motion the single question of whether the existing § 362 automatic stay could or should be extended to restrain further conduct of the Stelter litigation.
We will be making reference hereafter to facts suggested by the UCC and the respondents on the present motion, the truth of which we will accept only for purposes of the present motion. On March 8, 1996, pursuant to authorization sought by the UCC, the court authorized the UCC, among other things, to investigate and prosecute "any and all causes of action that may exist against any entity, individual, shareholder or insider that is related to, arises from or is in connection" with certain stock purchase transactions whereby the Swallen Family sold substantially all of their stock in the debtor to a group of investors. The Swallen Family received consideration for this transaction. Pursuant to the mentioned authorization by the court, the UCC considered the question of whether the transaction amounted to a fraudulent and/or preferential transfer. Before arriving at the Settlement Agreement with the Swallen Family, the UCC conducted extensive discovery and investigation. The UCC used this effort as a basis for reaching a settlement with the Swallen Family.
Pursuant to the Settlement Agreement, debtor will receive over $1.7 million from the Swallen Family. In exchange, the Swallen Family will receive a release of all claims arising from the stock purchase transaction, which release must include a full release of the Swallen Family from liability in the Stelter litigation, or "in the alternative, a permanent injunction enjoining any and all parties from continuation of the `Stelter' litigation or institution of any similar suit as to the `Swallen Family'." The Settlement Agreement also required the enforcement of the automatic stay or the issuance of an injunction by the court with respect to the Stelter litigation pending confirmation of a plan in the bankruptcy case. In its memorandum in chief, the UCC characterizes the Settlement Agreement as one which will generate $1,730,200.00 for the debtor's estate, "representing the avoidance of certain fraudulent conveyances and preferential transfers consummated shortly before the commencement of this Chapter 11 case."
The UCC with the exhibits which it submitted in support of the present motion included a copy of the complaint filed in the Stelter litigation in the Court of Common Pleas for Hamilton County. Plaintiffs in that suit (here "respondents") are a number of debenture holders of the debtor, and the complaint is framed as a class action for all debenture holders. The defendants in the state court action appear to include the same individuals and trusts as identified by the UCC as the Swallen Family, and in addition the individuals and corporations who purchased the stock of the debtor from the Swallen family.
After extensive allegations of purported facts, of which we will have more to say later, the complaint sets forth five counts. Count 1 is brought against certain defendants from both the Swallen Family and also the purchaser group, for fraud and breach of duty to plaintiff debenture holders. Count 2 is against all defendants, and is based on tortious interference with contractual relationships. That is, plaintiffs say that their debentures constitute contractual relationships and defendants' conduct interfered with those relationships. Count 3 is against the same defendants as are named in Count 1, for breach of fiduciary duty, which duty is alleged to have been breached by fraudulent conduct of defendants, consisting of failure to disclose to plaintiffs. Count 4 is against the same certain defendants as are named in Counts 1 and 3. It alleges negligence in the conduct of the named defendants in failing to disclose material facts. Count 5 is against all defendants and seeks punitive damages.
With respect to the single question to which we have indicated our present consideration will be directed, the UCC looks to § 362(a)(3) of the Bankruptcy Code as the basis for its claim. There, the Code says that the filing of debtor's petition:
The UCC then goes on to point out that the term "property of the estate" includes "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). The UCC in its memorandum asserts that in its settlement it is recovering property of the estate consisting of "both the claim itself and the property that was transferred." As the basis for its present contention that the § 362 automatic stay should be extended to the Stelter litigation, the UCC asserts that plaintiffs in the Stelter litigation are attempting "to pursue the claims and to recover funds that are property of the estate."
In their opposition to the present motion, respondents assert that the contentions of the UCC are incorrect, for, they say, their claims in the Stelter litigation are not property of the estate. They argue that the claims in the Stelter litigation are direct claims, not derivative claims, that is, they are personal to respondents, and are not claims of the debtor against the defendants. The claims, they say, are based upon the relationship between defendants and the debenture holders as a result of the representations that defendants made in offering circulars and other documents, and in oral communications; the failure of defendants to disclose certain facts to the debenture holders despite their continuing duty to do so, and their interference with the course of dealing between the debtor and the debenture holders.
The presentations by the parties thus require a determination of whether the Stelter litigation represents an "act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate." 11 U.S.C. § 362(a)(3). In dealing with the question of property of the estate in this case, we must deal with two distinct...
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