In re Transcolor Corp.
| Decision Date | 13 June 2003 |
| Docket Number | Bankruptcy No. 98-6-5483-JS.,Adversary No. 99-5627-JS. |
| Citation | 296 B.R. 343 |
| Parties | In re TRANSCOLOR CORPORATION, Debtor. National City Bank of Minneapolis, Plaintiff, v. Morton M. Lapides, Sr., et al., Defendants. |
| Court | U.S. Bankruptcy Court — District of Maryland |
Gregory Alan Cross, Andrew M. Dansicker, Venable, Baetjer and Howard, LLP, Baltimore, MD, Counsel for National City Bank.
Gerald F. Chapman, Bethesda, MD, Eric S. Lipsetts, Jepsen & Lipsetts, Annapolis, MD, Counsel for Morton M. Lapides, MML, Inc. and Alleco, Inc.
Monique D. Almy, Swidler, Berlin, Shereff and Friedman, LLP, Washington, D.C., Chapter 7 Trustee.
This opinion stands for the proposition that the holder of a claim against a Chapter 7 debtor corporation has standing to sue on the claim in the bankruptcy court against the debtor and the debtor's alter ego whose fraudulent misrepresentations on behalf of the debtor caused injury to the plaintiff and gave rise to the claim.
The instant complaint was brought by National City Bank of Minneapolis ("NCB") as trustee under certain trust indentures against Morton M. Lapides, Sr., and various corporations that he owned or controlled1, including the debtor, Transcolor Corporation ("Transcolor"), for misrepresentation, concealment by breach of duty to disclose and fraudulent conveyance. For the reasons stated, the complaint will be granted against Morton M. Lapides, Sr., and Alleco, Inc.2
On November 2, 1998, the instant involuntary Chapter 7 bankruptcy petition was filed in this Court against Transcolor by secured creditors Dean H. Foltz, Henrietta M. Foltz, and the Ronald S. Weidenbach Family Trust, debenture holders under two indentures, and later joined by NCB, the indenture trustee. On April 26, 1999, an order for relief under Chapter 7 was entered and on April 30, 1999, Monique D. Almy, Esquire, was appointed trustee.
On January 24, 2001, in response to the trustee's notice to file claims due to the recovery of assets, NCB filed Claim No. 4 in the amount of $6,772,161, plus interest and costs.3 The claim was based upon a default judgment obtained by NCB against Transcolor in a Michigan state court on January 22, 1998. The judgment was also against Transcolor's parent corporation, Alleco, Inc., for breach of contract. Proof of claim of NCB.
Transcolor is a subsidiary of Alleco, Inc. ("Alleco"). On June 1, 1992, Alleco filed a voluntary Chapter 11 bankruptcy petition in this Court, in Case No. 92-1-3268-SD, in which it described itself as a "holding company." The petition also indicated that 100% of the common stock of Alleco was owned by MML, Inc.4 The petition disclosed the following corporations that were "directly or indirectly owned, controlled or held, with power to vote, by the debtor (Alleco)": Macke Building Services, Inc. (100%); Alleco Financial Corp. (100%); Transcolor Corp. (98.5%); the debtor in the instant case, Transcolor, Inc. (100%); Transcolor West, Inc. (100%); Transcolor South, Inc. (100%); Valley Rivet Company, Inc. (100%); and Alleco Real Estate Corp. (100%). The corporate resolution attached to the petition identified Morton M. Lapides, Sr. ("Lapides"), as President of MML, Inc., and sole director and shareholder of Alleco. Among Alleco's 20 largest creditors listed were Dean H. Foltz and Henrietta M. Foltz, debenture holders, and First Trust National Association of St. Paul, Minnesota, the trustee under various indentures.
This Court [Derby, J.] confirmed Alleco's Chapter 11 plan of reorganization by order [P. 474] entered September 17, 19935, and as part of the plan, approved the form of an indenture (the "Indenture") executed on October 1, 1993, between Alleco as issuer and NCB as trustee. Plaintiff's Exhibit No. 3. The Indenture obligated Alleco to issue secured notes (the "Secured Notes") to certain creditors (the "Debenture Holders"). Under a supplemental indenture dated July 31, 1995 (the "Supplemental Indenture"), in which NCB continued to serve as trustee, Transcolor was added as an additional obligor on the Secured Notes and thereby became bound to the terms of the Indenture. Plaintiff's Exhibit No. 4. Both documents were executed under seal. The Indentures provided that they were to be governed according to Maryland law. Section 1.12. NCB was given authority as indenture trustee to "institute any actions or judicial proceedings at law or in equity" to collect monies due under the Indentures, Section 5.03(b), and to file proofs of claim in any bankruptcy or insolvency proceedings of the Indenture obligors. Section 5.04. The Indentures contained an exculpatory clause purporting to insulate all individual corporate stockholders, officers and directors from any liability whatsoever. Section 14.01.6
Lapides signed the Supplemental Indenture on behalf of both Alleco and Transcolor. When Transcolor failed to make the payments of principal and interest to NCB required by the Indentures, NCB filed suit in Michigan and obtained the judgment against Transcolor.
NCB discovered that a series of transactions initiated by Lapides in connection with his acquisition of Winterland Corporation caused Transcolor to violate the terms of the Indentures. On August 14, 1996, the first transaction occurred (characterized by the plaintiff as "the Winterland transaction"), by which MML purchased 100% of the stock of Winterland. To finance the purchase, MML borrowed millions of dollars from Gordon Brothers Capital Corporation and Madeleine, LLC, guaranteed by MML and by Mr. and Mrs. Lapides. The Lapideses pledged their residence as collateral for the personal guarantees.
In connection with the Winterland purchase, Transcolor was required to transfer all its business assets to Winterland and to lease its machinery, real property, proprietary rights, intellectual property, customer lists, contract rights and clothing lines to Winterland. Transcolor also gave Winterland an option to purchase the leased assets after a period of years at a price of $5 million. Lapides represented both MML and Transcolor and signed all of the documents on behalf of both corporations. Lapides, MML and the lenders had agreed that Transcolor would receive $5.4 million in cash and also a $14 million lease agreement to be paid over ten years in return for transferring possession and control of all its assets to Winterland. Instead, on the date of the transaction, Transcolor was paid only $1.3 million, leaving a balance due of $4.1 million.
Two days later, on August 16, 1996, a second transaction occurred known as the "Winterland Revisory Transaction." Instead of Winterland paying the $4.1 million dollar balance to Transcolor, Winterland tendered Transcolor a $4.1 million promissory note. The price of Winterland's purchase option was reduced to $3.5 million and Winterland was given a purchase option on all of Transcolor's leased assets for only $1. As a result, Transcolor lost over $1 million in the transactions. A large portion of the $1.3 million that Transcolor received was transferred immediately to Lapides. Lapides refused another lender's offer to refinance the Winterland purchase because it would have resulted in his losing a degree of company control.
Nine months later, on April 11, 1997, a third transaction known as the "Winterland Settlement Agreement" occurred. Despite the fact that Transcolor had already been rendered insolvent by the August 16, 1996, transaction, Lapides entered into the Winterland Settlement Agreement with the lenders on behalf of Winterland MML and himself, by which MML gave the lenders 80% of its ownership interest in Winterland. In addition, Lapides agreed on behalf of Transcolor to give up 90% of the ten-year, $14 million lease that Transcolor had with Winterland, shortening the lease term by nine years. Therefore, what began for Transcolor as $14 million in guaranteed lease payments for its machinery and $5.4 million in cash ultimately resulted in its receipt of only $1.3 million in cash, much of which went to Lapides personally, and a few months' worth of lease payments. In return, the lenders released the loan guarantees that MML and the Lapideses had given on Winterland's $13 million debt, representing a benefit to Lapides by eliminating his personal liability and that of his wife and thereby saving the family residence. These transactions were the subject of a suit brought by Transcolor against Cerberus Partners, L.P., Madeleine, LLC, and Gordon Brothers Capital Corporation (Adversary proceeding No. 99-5464-JS), in which Transcolor admitted that the subject conveyances were made for no consideration and in order to benefit Lapides. See Transcolor Corp. v. Cerberus Partners, LP (In re Transcolor), 258 B.R. 149 (Bankr.D.Md.2001).
On August 13, 1999, NCB filed the instant complaint in this Court which indicated that the Supplemental Indenture prohibited Transcolor and Alleco from transferring all or substantially all of their assets unless the transferee assumed their obligations; that the Indenture required Transcolor and Alleco to provide written statements to NCB certifying compliance with the Indentures; and that, in derogation of those requirements, Lapides engaged in the three transactions between August, 1996, through April, 1997, by which he transferred all the assets of Transcolor to Winterland, which were fraudulent transfers as to NCB, and caused Transcolor and Alleco to furnish materially false compliance certificates to NCB which failed to disclose the transactions.
The complaint was premised upon allegations of fraud, fraudulent misrepresentation,...
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