In re Tri-State Armored Services, Inc., Bankruptcy No. 01-11917/JHW.

CourtU.S. Bankruptcy Court — District of New Jersey
Writing for the CourtJudith H. Wizmur
Citation332 B.R. 690
PartiesIn the matter of TRI-STATE ARMORED SERVICES, INC., Debtor. Great American Insurance Companies, Plaintiff, v. Thomas J. Subranni, Esquire, Trustee for the Estate of Tri-State Armored Services, Inc., Defendant.
Decision Date03 October 2005
Docket NumberAdversary No. 01-1132.,Bankruptcy No. 01-11917/JHW.
332 B.R. 690
In the matter of TRI-STATE ARMORED SERVICES, INC., Debtor.
Great American Insurance Companies, Plaintiff,
Thomas J. Subranni, Esquire, Trustee for the Estate of Tri-State Armored Services, Inc., Defendant.
Bankruptcy No. 01-11917/JHW.
Adversary No. 01-1132.
United States Bankruptcy Court, D. New Jersey.
October 3, 2005.

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John N. Ellison, Esq., Claudine Q. Homolash, Esq., Anderson Kill & Olick, Philadelphia, PA, Thomas Subranni, Esq., Nona L. Ostrove, Esq., Subranni & Ostrove, Voorhees, NJ, for Thomas J. Subranni, Trustee for the Estate of Tri-State Armored Services, Inc.

Steven N. Dratch, Esq., Julian Wilsey, Esq., Franzblau Dratch, Livingston, NJ, for Great American Insurance Companies.

John G. Buchanan III, Esq., Covington & Burling, Washington, DC, for NCR Corporation.

Ronald L. Glick, Esq., Stevens & Lee, Cherry Hill, NJ, for Diebold, Inc.

Philip B. Seaton, Esq., Gregory A. Lomax, Esq., Kevin H. Buraks, Esq., Wolf, Block, Schorr & Solis-Cohen, Cherry Hill, NJ, Steven J. Mandelsberg, Esq., Hahn & Hessen LLP, New York, NY, for American

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Express Travel Related Services Company, Inc.

Barbara Lanza Farley, Esq., Haddonfield, NJ, for Palm Desert National Bank.


JUDITH H. WIZMUR, Chief Judge.

In this adversary proceeding, the plaintiff, Great American Insurance Companies ("Great American"), seeks a declaratory judgment determining that the bankruptcy estate of the Chapter 7 debtor, Tri-State Armored Services, Inc. ("Tri-State"), is not entitled to insurance coverage under the crime insurance policies issued by the plaintiff to Tri-State prior to the filing of the bankruptcy petition. Great American seeks rescission of the policies issued to Tri-State for the years 1999 and 2000 on the ground of equitable fraud.1 In the alternative, Great American relies upon contract exclusions to seek a declaratory judgment that Tri-State is not entitled to coverage. Because I conclude that the 1999 and 2000 policies issued by Great American to Tri-State may be rescinded on this record, I need not reach the contract exclusion issues posed.

In his counterclaim, the Chapter 7 trustee charges Great American with exercising bad faith in the procedures Great American employed in investigating and ultimately denying the claims of the Tri-State bankruptcy estate. The trustee asserts three causes of action in this regard, including breach of the implied covenant of good faith and fair dealing, violation of the New Jersey Consumer Fraud Act, N.J.S.A. § 56:8-1 et seq., and breach of an alleged fiduciary duty owed by Great American to Tri-State. As explained below, I conclude that none of these causes may succeed in this case.2 The trustee's quest for compensatory and punitive damages for fraudulent and/or negligent concealment or destruction of evidence must also fail on this record.

I. Facts and Procedural History

Tri-State Armored Services, Inc., the debtor herein, was an armored car company in the business of servicing automated teller machines ("ATMs") owned primarily by banks and other financial institutions. Tri-State operated in various states, including New Jersey, Pennsylvania, Maryland, Virginia and Connecticut. The company contracted directly with Diebold, Incorporated ("Diebold") and NCR Corporation ("NCR"), who in turn contracted with financial institutions to service their ATMs. Although there was no direct contractual relationship between Tri-State and most bank customers, the banks would routinely supply funds for their ATMs directly to Tri-State.

On or about October 20, 1997, Great American issued a comprehensive crime insurance policy to Tri-State, wherein the insurer agreed, subject to the policy's terms and conditions, to reimburse Tri-State for losses sustained by the insured caused by the fraud or dishonesty of its employees. The policy was renewed by the insurer from year to year, including

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the year commencing October 20, 2000. Tri-State terminated its operations on or about March 1, 2001.

Several of the individuals employed by the debtor, including William Mottin, Daniel Feuker, Barry Chesla, Joseph Fernandez and Nicholas Basile, engaged in extensive theft of money and property belonging to Tri-State's customers. In 2001, each of these individuals pled guilty to various conspiracy, money laundering and tax evasion charges.

Tri-State filed a Chapter 7 bankruptcy petition on March 2, 2001. Thomas J. Subranni, Esquire, was appointed as the Chapter 7 trustee.

On June 4, 2001, Great American filed this adversary proceeding, seeking a declaratory judgment to rescind the insurance policy and to declare that Tri-State had no insurance coverage. The trustee counterclaimed, seeking a declaratory judgment against Great American establishing insurance coverage, and for other relief. The trustee was joined in his counterclaim by several Intervenor Defendants.3 Following extensive pretrial proceedings, the matter was tried for seventeen (17) days in 2003 and 2004, and hundreds of documents were marked into evidence.

As is relevant here to develop the factual background, I will review the operations of the debtor's predecessor, Executive Cash Services, Inc. ("Executive Cash"), the operations of Tri-State, and the circumstances surrounding Tri-State's insurance coverage with Great American.

A. Executive Cash Services, Inc.

The predecessor of Tri-State, Executive Cash, was an armored car company owned by Daniel Antolini. As with Tri-State, the primary business of Executive Cash was the servicing of ATMs. In early 1997, Executive Cash contracted with CoreStates Bank to service about 500 of its ATM machines, CoreStates became dissatisfied with the performance of Executive Cash, terminated the contract around June 1997, and made a claim against Executive Cash for losses. Lloyds of London, Executive Cash's insurer for such losses, apparently denied coverage for the claim.4

During the summer of 1997, Antolini announced that he would close Executive Cash, but offered to the employees of the company the opportunity to purchase its assets. Five employees, including William Mottin, Daniel Feuker, Barry Chesla and two others, determined to purchase the assets. Tri-State Armored Car Services was incorporated on or about September 15, 1997, and commenced operations on October 1, 1997. The settlement with Executive Cash took place on or about October 21, 1997.5

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B. Tri-State Armored Car Services, Inc.

Tri-State took over all of the assets of Executive Cash, including the entire customer base. Certain designated liabilities, such as vehicle loans, were assumed. Although new operating accounts were opened in Tri-State's name in October 1997, Tri-State continued to use the wire transfer account formerly used by Executive Cash, into which customers would wire cash for ATM replenishment, until December 1997, when Tri-State opened a new wire transfer account. The wire transfer account was not reconciled prior to or after the settlement with Executive Cash. Although financial statements of Executive Cash were promised to be provided by Antolini, such statements were never produced. Tri-State did not assume the Executive Cash liability to CoreStates.

The new shareholders of Tri-State were Barry Chesla (26%), William A. Mottin (18%), Daniel C. Feuker (18%), Thomas J. Thorton, III(18%) and Kenneth D. Bacan (20%).6 All of the shareholders of the corporation were also directors and officers of the corporation. Mottin was designated as president and treasurer, while Chesla was the chief executive officer and secretary.

From the inception of Tri-State in October 1997, Mottin was the manager, the operational head and the decision maker at Tri-State. Tri-State's administrative headquarters were located in Hammonton, New Jersey, where Mottin and Feuker were stationed. Feuker ran the armored car aspect of the operation, including the management of guards, drivers and trucks.

Although Chesla held the title of CEO, he was located in Ligonier, Pennsylvania and he did not participate in the overall day-to-day operations of the company. Prior to the formation of Tri-State, he had served as the Ligonier terminal manager for Executive Cash. He continued in that role for Tri-State until some time in 1998, when he resigned his position as a Tri-State officer, director and employee. Tri-State agreed to purchase Chesla's stock in the company.7 Tri-State also agreed to make lease payments to Chesla as the landlord for the Ligonier facilities because he owned the real estate which Tri-State occupied. Following his resignation, Chesla maintained an office on the Tri-State premises in Ligonier, and remained Tri-State's landlord in Ligonier.

From the commencement of Tri-State's business in October 1997 through on or about March 1, 2001, when Tri-State closed its doors and terminated operations, Tri-State never made a profit, although it grew to service 3,000 ATM machines, employed up to 200 people, and increased its annual gross revenues from $2 million to $6 million. For the year ending December 31, 1998, the company showed a book loss of $819,713.00 on its compiled financial

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statement. For 1999, the book loss increased to $1,585,000.00. From the commencement of operations, operating expenses exceeded income by approximately $70,000.00 per month. The company routinely commingled the funds of the various financial institutions which it serviced, both in its wire account and its cash vault. Funds belonging to one bank would routinely be used to service the ATMs of another bank.

According to the accounting report submitted on behalf of the Chapter 7 trustee, as of the termination date of March 1, 2001, Tri-State customer claims ($54.6 million dollars) exceeded the funds recovered by the trustee...

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