In re E-Tron Corp., Bankruptcy No. 86-04126
| Decision Date | 04 June 1992 |
| Docket Number | Adv. No. 90-3025 SAS.,Bankruptcy No. 86-04126 |
| Parties | In re E-TRON CORPORATION, Debtor. David P. MICHAELS, Trustee, Plaintiff, v. NATIONAL BANK OF SUSSEX COUNTY, Defendant. |
| Court | U.S. Bankruptcy Court — District of New Jersey |
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James F. Keegan, Bendit, Weinstock & Sharbaugh, West Orange, N.J., for David P. Michaels, Trustee, plaintiff.
Ira M. Levee, Ravin, Sarasohn, Cook, Baumgarten, Fisch & Baime, Roseland, N.J., for Nat. Bank of Sussex County, defendant.
On July 3, 1986, E-Tron Corporation ("E-Tron" or "debtor") filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. 11 U.S.C. § 1101 et seq. (hereinafter "Bankruptcy Code" or "Code"). The case was converted to chapter 7 on May 11, 1988. On May 12, 1988, David P. Michaels was appointed as trustee. He filed this adversary proceeding on January 22, 1990 to expunge the claim of National Bank of Sussex County ("NBSC" or "Bank") and to avoid several allegedly preferential and fraudulent transfers made by E-Tron to NBSC.
The trustee filed this motion on September 16, 1991, returnable October 15, 1991, seeking summary judgment dismissing a counterclaim filed by NBSC, which sought nunc pro tunc approval of a loan by NBSC to E-Tron for a purchase of assets out of the ordinary course of business. The trustee's motion also seeks to renew portions of a previous motion for summary judgment heard June 4, 1991, which had been denied without prejudice. NBSC filed a cross-motion for summary judgment based on the argument that the trustee's cause of action is barred by the statute of limitations in Code section 549(d)(1).
This court has subject matter jurisdiction under 28 U.S.C. §§ 1334 and 151. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (E), (F), (G), (H) and (O). For the reasons which follow, the trustee's motion for summary judgment is granted in part and denied in part, and NBSC's motion is denied. This shall constitute the court's findings of fact and conclusions of law.
FINDINGS OF FACT
The following material facts are undisputed.
E-Tron and NBSC commenced a lending relationship a few months prior to the filing of E-Tron's bankruptcy petition on July 3, 1986. Prior to the loan in question, E-Tron received bankruptcy court approval for two postpetition credit transactions with NBSC. Specifically, E-Tron received the benefit of a letter of credit in the amount of $155,280 issued to Onan Corporation on October 15, 1986. See Affidavit of Sherri Davis Fowler in Support of Motion for Summary Judgment on the Counterclaim and for Partial Summary Judgment on the Complaint, Exhibit E, at 2. On February 26, 1987, NBSC also issued a $200,000 line of credit to E-Tron secured by an assignment of accounts receivable and certain contract rights. These transactions were authorized by this court on March 4, 1987 and March 17, 1987, respectively. See Trustee's Brief in Support, at 5.
The subject of this adversary proceeding is a loan made by NBSC to E-Tron on September 23, 1987 for which court approval was not obtained. On that date, NBSC loaned $500,000 to the debtor, purportedly for the purchase of machinery and equipment owned by a company by the name of Jamaica Plastics. NBSC has no formal commitment letter in its records for the loan which it made to E-Tron to finance this purchase. See Exhibit I to 1/17/90 Complaint. A promissory note was executed, however, and NBSC took a security interest in the machinery and equipment. The loan was authorized by NBSC's loan committee based solely on the representations of John Sweet, a Vice President of NBSC. See Exhibit C, Affidavit of Counsel, June 23, 1988 claim to Fidelity Deposit Company of Maryland, at 3.
The proceeds from the unauthorized $500,000 loan were disbursed by NBSC in six cashier's checks all executed by John Sweet. The first check in the amount of $200,000 was deposited by E-Tron in its name in a certificate of deposit at NBSC. Two checks totaling $250,000 were made out to E-Tron and Jamaica Plastics to finance the purchase. The fourth check was made out to NBSC in the amount of $10,000 to pay for the "points" charged by the Bank to obtain the $500,000 loan. The fifth check totaled $34,116.80 and was applied against the outstanding balance of the $200,000 revolving stand-by letter of credit which was previously authorized by the court. The sixth check made out to E-Tron represented the $5,883.20 balance of the unused proceeds of the loan. The record to this point does not indicate whether E-Tron received all of the loan proceeds and whether Jamaica Plastics was paid for the equipment in question. The trustee alleges, but has not documented, that part of the loan proceeds was diverted by Sweet and was never used to acquire the assets of Jamaica Plastics. The trustee indicates, however, that E-Tron obtained an interest in some of Jamaica Plastics manufacturing equipment, subject to a landlord's lien. Ultimately, this equipment was abandoned by the trustee under a settlement with the landlord. The landlord waived all claims against the trustee and the debtor's estate. See Consent Order of 3/27/89, Document # 382, E-Tron Corporation, main bankruptcy case (86-04126), (confirming abandonment of property and waiver of claim against estate as to Goldsul Partners). Before this occurred, however, the debtor incurred expenses and attorney's fees in attempting to sell the equipment. Exclusive of attorney's fees, debtor's general ledger shows expenditures related to Jamaica Plastics totaling $22,685.80. See Trustee's Brief in Opposition to Cross-Motion to Dismiss, at 4 n. 3.
From October through December of 1987, E-Tron made payments on the outstanding loan balance according to the loan payment schedule. On November 27, 1987, Sweet caused NBSC to unilaterally set off the $200,000 certificate of deposit which E-Tron had purchased with part of the loan proceeds and applied it against the $500,000 loan balance. On December 9, 1987 NBSC terminated Sweet's employment because of various improper acts, including diversion of part of the proceeds of the loan in question to his personal use.
On January 11, 1988, NBSC filed a Criminal Referral Form with the Office of the Comptroller of the Currency, reporting certain activities of John Sweet, including his role in the September 23, 1987 loan transaction with E-Tron. As a result of an apparent internal investigation and discovery of other questionable loans, NBSC later filed an Amended Criminal Referral Form with the Office of the Comptroller of the Currency, the FBI and the Office of the United States Attorney. See Supplemental Certification of Kenneth Spriggs, Vice President of NBSC, dated December 3, 1991, at 2. NBSC did not notify the bankruptcy court or E-Tron's trustee of the criminal referral or the ongoing investigation. NBSC asserts, however, that "except as was necessary to protect the integrity of an investigation by the FBI and to protect its depositors, the Bank has not intentionally concealed information from the trustee herein." Id. at 3.
Subsequent to the conversion of the case to chapter 7 and appointment of the trustee, NBSC filed a proof of claim against the debtor's estate in the amount of $537,770.58. The trustee filed this adversary proceeding on January 22, 1990 to expunge the proof of claim of NBSC, and to avoid several allegedly preferential and fraudulent transfers made by the debtor to NBSC. These transfers related to the on-going business of the debtor and the September 23, 1987 loan.
By motion heard June 4, 1991, the trustee sought partial summary judgment on the complaint, and an order requiring NBSC to provide specific discovery. By order of July 1, 1991, the court directed NBSC to provide specific documents to the trustee and granted partial summary judgment on four issues. The court determined that the debtor's purchase of the assets of Jamaica Plastics and the September 23, 1987 loan transaction were not in the ordinary course of the debtor's business. The court also determined that bankruptcy court approval was therefore required for both the loan transaction and the purchase. 11 U.S.C. §§ 363(b) and 364. The court held that court approval was also required to grant NBSC a security interest in the Jamaica Plastics equipment and machinery. The court also allowed NBSC to file a counterclaim seeking nunc pro tunc approval of the loan transaction.
NBSC filed the counterclaim on June 12, 1991 and it was answered by the trustee on July 1, 1991. The trustee filed the subject motion for summary judgment on September 16, 1991. The motion essentially seeks denial of the application for nunc pro tunc approval of the September 23, 1987 loan transaction, turnover by NBSC of the $200,000 certificate of deposit (# 36941) which NBSC unilaterally set off, turnover by NBSC of the proceeds of bank checks (# 151472 & # 151473) with interest from September 23, 1987, turnover by NBSC of all payments of principal and interest made by the debtor against the unauthorized September 23, 1987 loan, and expungement of NBSC's proof of claim.
NBSC filed a cross-motion for summary judgment dismissing the complaint on the grounds that the trustee's cause of action was time-barred because of the statute of limitations contained in section 549(d)(1).
Rule 56 of the Federal Rules of Civil Procedure, made applicable to adversary proceedings by Federal Rule of Bankruptcy Procedure 7056, states that summary judgment shall be granted to the moving party if the court determines that "the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there are no genuine issues as to any material fact and that the moving party is entitled to judgment as a matter of law." Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); ac...
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