In re Value Music Concepts, Inc.

• Decision Date: 22 August 2005
• Docket Number: Bankruptcy No. 03-61285.,Adversary No. 04-06208.,Adversary No. 04-06223.,Adversary No. 04-06205.,Adversary No. 04-06210.,Adversary No. 04-06199.,Adversary No. 04-06195.,Adversary No. 04-06207.,Adversary No. 04-06194.
• Citation: 329 B.R. 111
• Parties: In re VALUE MUSIC CONCEPTS, INC., Central South Music Sales, Inc., Kar, Inc., Records Central, Inc., and Music 4 Less, Inc., Debtors. William Kaye, as Creditor Representative for Value Music Concepts, Inc., et al., Plaintiff, v. A.R.E. Distribution & Alpine Records, LLC; Atlanta International Record Company, Inc.; Bookworld Christian, Inc.; Compendia Media Group Corporation; Word Entertainment, Inc.; Provident Music Distribution, Inc.; Juanita Bynum Ministries, Inc.; and New Day Christian Distributors, Inc., Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Georgia

Page 111

329 B.R. 111

In re VALUE MUSIC CONCEPTS, INC., Central South Music Sales, Inc., Kar, Inc., Records Central, Inc., and Music 4 Less, Inc., Debtors.

William Kaye, as Creditor Representative for Value Music Concepts, Inc., et al., Plaintiff, v. A.R.E. Distribution & Alpine Records, LLC; Atlanta International Record Company, Inc.; Bookworld Christian, Inc.; Compendia Media Group Corporation; Word Entertainment, Inc.; Provident Music Distribution, Inc.; Juanita Bynum Ministries, Inc.; and New Day Christian Distributors, Inc., Defendants.

Bankruptcy No. 03-61285.

Adversary No. 04-06194.

Adversary No. 04-06195.

Adversary No. 04-06199.

Adversary No. 04-06205.

Adversary No. 04-06207.

Adversary No. 04-06208.

Adversary No. 04-06210.

Adversary No. 04-06223.

United States Bankruptcy Court, N.D. Georgia, Atlanta Division.

August 22, 2005.

COPYRIGHT MATERIAL OMITTED

James R. Sacca, Greenberg Traurig, LLP, Atlanta, GA, for Plaintiff.

Catherine A. Harrison, Miller & Martin PLLC, Atlanta, GA, for Defendants.

ORDER ON DEFENDANTS' MOTIONS FOR SUMMARY JUDGMENT

PAUL W. BONAPFEL, Bankruptcy Judge.

The Plaintiff seeks to recover alleged preferential transfers from the Defendants for the benefit of unsecured creditors in his capacity as the Creditor Representative appointed pursuant to 11 U.S.C. § 1123(b)(3) under the confirmed chapter 11 plan of the Debtors, Value Music Concepts, Inc. ("Value Music") and its four subsidiaries. The alleged transfers arise out of transactions summarized as follows.

The Debtors had certain claims against the previous owners of the subsidiaries and the previous owners' companies. In satisfaction of these claims, the previous owners and their companies assumed and paid certain obligations of the Debtors, including debts to the Defendants. All of the debts except that of New Day Christian Distributors, Inc. ("New Day") were assumed under a Settlement Agreement that the Debtors entered into with the previous owners and their companies two weeks before the chapter 11 filings; the New Day assumption occurred about two months earlier. The Creditor Representative contends that the assumption and payment of the debts owed to the Defendants instead of payment of cash to the Debtors constituted transfers of the Debtors' property that are avoidable as preferences under 11 U.S.C. § 547(b).

The Defendants raise two defenses in their motions for summary judgment. The first is that the Creditor Representative cannot bring these actions because the plan did not specifically identify the Defendants or explicitly describe these actions so as to preserve the alleged transfers as postconfirmation claims for prosecution. Without such specificity, the Defendants argue, the plan did not expressly reserve these preference actions from the res judicata effect of the confirmation order; alternatively, they argue that the plan did not expressly identify the actions, as § 1123(b)(3) requires, for the Creditor Representative to have authority to bring them. Second, the Defendants other than New Day assert that the Creditor Representative cannot recover the payments as preferential transfers because they were made under the Settlement Agreement that is an assumed executory contract under 11 U.S.C. § 365.

The Court concludes that the plan's description of avoidance actions, including preference claims, as the type or category of causes of action of the estates to be retained and prosecuted by the Creditor Representative is sufficient to expressly reserve them from any possible res judicata effect of the confirmation order and to expressly identify them for postconfirmation prosecution under § 1123(b)(3) by the Creditor Representative. Furthermore, the Court concludes that the Settlement Agreement was not an executory contract; therefore, the fact that assumption and payment may have been made pursuant to it does not provide a defense to the preference actions. Thus, the Court denies the motions for summary judgment.

I. FACTS

On September 13, 2002 (four and a half months before the chapter 11 filings on January 27, 2003), Value Music acquired four subsidiaries, Central South Music Sales, Inc., KAR, Inc., Records Central, Inc., and Music 4 Less, Inc. (the "Debtor Subsidiaries") from their former owners, Randall Davidson, Greg Davidson, and others (the "Central South Shareholders"). The Central South Shareholders received 50 percent of Value Music's stock and controlled half of its board of directors. After the transaction, the Davidsons became officers and directors of Value Music.

The Central South Shareholders continued to own and operate Central South Christian Distributors, Inc., Central South Gospel, Inc., and Central South Distribution, Inc. (the "Central South Companies"). The Debtors and the Central South Companies were all engaged in the wholesale and retail distribution of music and related products.

In connection with the acquisition, Value Music agreed to sell to the Central South Companies, at cost, certain inventory that the Debtors had purchased from the Defendants and perhaps others.¹ The purchase price was to be paid in cash or, if the Debtors consented, by assumption of the Debtors' debts to the vendors who had sold it. One half was paid in cash, and the balance was due by December 12.

A dispute arose over a $3.6 million understatement of the amount of payables owed by the Debtor Subsidiaries at the time Value Music acquired them. Value Music claimed that the Central South Shareholders were liable for the understatement as a breach of warranties and representations in the acquisition agreement. Value Music excluded the Davidsons from any positions of operational control (apparently under pressure from its secured lender, which was threatening declaration of default due to the additional payables) and cut their salaries in half. In November the parties began negotiations with regard to resolution of their disputes.

In the meantime, the Central South Companies assumed and paid about $83,000 of payables (including $39,809 owed to New Day)² as partial payment for the inventory purchase. They also requested that Value Music permit the Central South Companies to pay the remaining purchase price by assumption of debts to certain vendors, which also sold to the Central South Companies. Value Music denied this request and demanded cash. The Central South Companies declined to pay cash unless it was earmarked to pay the vendors. As these events were occurring, Value Music decided not to pay rent and property taxes due under a warehouse lease that Value Music had executed in connection with the acquisition with a partnership comprised of some of the Central South Shareholders.

On January 10, 2003, the parties entered into a Settlement Agreement³ that resolved all disputes. The Central South Shareholders relinquished their stock in Value Music and resigned as officers and directors. (Settlement Agreement ¶¶ 3, 8). With regard to reduction of the Davidsons' salary and employment termination, the Settlement Agreement provided that Randall Davidson's salary through January 10, 2003, would be restored to its original level and paid through January 10, and that he would receive salary at the one-half rate from January 10 through February 28. Greg Davidson's salary was not restored, and he was to continue to receive salary through January 31. On the date salary ended, each would "automatically cease to be an employee." (Settlement Agreement, ¶¶ 1, 2).

The Debtors' claim for the balance of the inventory purchase price was resolved by the assumption by the Central South Companies and three of the Central South Shareholders of the Debtors' obligations to the vendors which had sold the inventory to the Debtors. (Settlement Agreement ¶ 6 and Schedule 6). These Central South parties also agreed to assume an additional $750,000 of the Debtors' accounts payable. (Settlement Agreement ¶ 10 and Schedules 6, 10(b)). The Central South Companies thus assumed a total of $1,343,454.92 in payables, of which $821,677 was due to the seven Defendants other than New Day, which had been paid earlier.⁴ In addition, certain of the Central South Shareholders who had guaranteed a November 2002 loan from Union Planters' Bank to a Debtor Subsidiary agreed to assume and pay it. (Settlement Agreement ¶ 6).

With regard to the warehouse lease, the agreement provided for its automatic termination on January 31, 2003, and the Debtors' payment, in full satisfaction of their lease obligations, of 75 percent of the rent for the period from September 13, 2002, through January 31, 2003, and all real property taxes due. A related sublease was also terminated. (Settlement Agreement ¶¶ 4, 5).

The Settlement Agreement also dealt with certain assets. The Central South Companies retained an aircraft that they had leased from a Debtor Subsidiary the day before the acquisition, when the Central South Shareholders had owned the subsidiary. The Settlement Agreement modified the lease to provide that the Central South Companies would pay rent of $1.00 per month and, as additional rent, all amounts due on a loan secured by the aircraft payable to SouthTrust Bank. (Settlement Agreement ¶ 9). Similarly, the Settlement Agreement effected the transfer of a computer system and certain furniture from a Debtor Subsidiary to a Central South Company for $39,128. (Settlement Agreement ¶ 10(a)). Intercompany accounts were also resolved. (Settlement Agreement ¶ 11).

Finally, the two sides exchanged releases of claims except those arising out of the Settlement Agreement. Thus, Value Music and the Debtor Subsidiaries released the Central South Shareholders, and they, in turn, released the Debtors. (Settlement Agreement ¶¶ 12, 13). Among other things, the releases extinguished the Debtors' claims against the Central South Shareholders for the $3.6 million understatement of payables arising out of the acquisition agreement.

The Debtors filed their chapter 11 cases o...