In re Vermont Toy Works, Inc.
| Citation | 82 BR 258 |
| Decision Date | 23 December 1987 |
| Docket Number | Bankruptcy No. 85-252,Adv. P. No. 86-0007. |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court —District of Vermont |
| Parties | In re VERMONT TOY WORKS, INC., Debtor. CHITTENDEN TRUST COMPANY, Plaintiff, v. SEBERT LUMBER, CO., INC., Defendant, J.C. Palmisano, Esq., Trustee and Intervening Defendant. |
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J.B. Anderson, Ryan Smith & Carbine, Ltd., Rutland, Vt., and M.H. Scribner, Burlington, Vt., for Chittenden Trust Co. (Chittenden).
J.R. Canney, III, and B.P. Dempsey, Carroll, George & Pratt, Rutland, Vt., for Sebert Lumber, Co., Inc. (Sebert).
P. Gabel, Goldstein, Manello, Burak & Gable, Burlington, Vt., for Vermont Wood Industries, Inc. (Vermont Wood).
J.C. Palmisano, Barre, Vt., for the Trustee (Trustee).
This proceeding began with Chittenden's complaint for a declaratory judgment. Chittenden requests that we determine the collateral it repossessed from Vermont Toy Works, Inc. prepetition is not property of the Debtor's estate. In the alternative, Chittenden moves for relief from the automatic stay of the Bankruptcy Code, and approval of its repossession.
Based upon the litigated evidence, pleadings, and the voluminous and competent briefings by counsels, we hold: that the Trustee has standing as a hypothetical judicial lien creditor to affirmatively raise the equitable doctrine of marshaling2 of assets; that an unsecured creditor's attorney may prosecute on behalf of the Trustee a contested matter with the Trustee's consent and the Court's approval; that the inequitable conduct of Debtor's director, officer, and shareholder is sufficient to warrant the piercing of the corporate veil and the application of the marshaling of assets doctrine; that Chittenden may seek satisfaction of its secured claim from the personal guarantees of Debtor's president and vice president; that Chittenden may use the securities hypothecated by Debtor's director, officer, shareholder, and his spouse, and pledged by the Debtor for its loans in the unlikely event the guarantees are insufficient; that the proceeds from the repossessed collateral are property of the Estate; and, after marshaling, that Debtor's director, officer, and shareholder's inequitable conduct requires equitable subordination of his subrogated guarantor relationship under 11 U.S.C. § 510(c).
On December 31, 1985, Sebert, an unsecured creditor, with other unsecured creditors filed an involuntary Chapter 7 petition against Vermont Toy Works, Inc. (Debtor). 11 U.S.C. § 101 et seq.
Sebert concomitantly filed an ex parte motion for an order staying Debtor from disposing of some or all of its assets at a private sale, scheduled for the morning of December 31, 1985, between Chittenden and Vermont Wood. We denied Sebert's motion by our Order Denying Motion for A Specific Stay, filed December 31, 1985, holding that 11 U.S.C. § 303(f)3 permits a Debtor to operate its business and conduct its affairs as if a petition had not been filed during the "involuntary gap" period, (between the date of the filing of the involuntary petition and the order of relief), and that Sebert failed to "satisfy the legislatively suggested reasons" for judicial curtailment of Debtor's financial affairs.4 In addition to Sebert's failure to establish the exception to the general rule of permitting the Debtor to operate its business within the "gap period," we said:
We also deny the relief requested because other subsequent relief may be available, if the movant herein, makes a case under 11 USC Section 362(a)(6) or (7), or if an Order for relief is subsequently entered and the trustee moves under 11 USC Section 547.
Order Denying Motion for A Specific Stay, page 3, filed December 31, 1985. (Emphasis supplied).
Chittenden perceived the December 31, 1985 Court Order, as placing a "cloud" on its title to the pre-petition repossessed collateral. On January 17, 1986, Chittenden filed a "Complaint For Declaratory Judgment Or Motion For Relief From Automatic Stay"5 to remove the alleged "cloud" so Chittenden and Vermont Wood could complete their pre-petition contract for the sale and purchase of the disputed collateral. For some reason, discernable only to it, Chittenden's complaint named Sebert as Defendant. Sebert answered the complaint on January 30, 1986.
Sebert filed, on January 28, 1986, a motion for an appointment of interim trustee and, on January 29, 1986, we entered an Order for Relief Under Chapter 7 and Order Appointing Interim Trustee.
At a February 21, 1986 hearing, the Trustee, Chittenden, and Sebert consented, with conditions, to allow Chittenden to sell the disputed pre-petition repossessed equipment and machinery collateral to Vermont Wood. On March 7, 1986, we entered an Order Authorizing Sale of Property which approved the conditions and permitted Chittenden, as agent of the Trustee, to sell the pre-petition repossessed collateral, for the amount of the outstanding balance of Chittenden's and the Vermont Industrial Development Authority's notes, to Vermont Wood free and clear of all liens, encumbrances, and interests of any party. We also Ordered that Chittenden's security interest attach to the proceeds and that the proceeds were to be held in an interest bearing account pending the outcome of this adversary proceeding.6
Within 60 days of the Trustee's appointment and the Court's Order for relief, 11 U.S.C. § 108(b)(2), the Trustee filed a petition to marshal assets and moved in Open Court, during the first of a five day bench trial, to intervene as a matter of right, Rules of Practice and Procedure in Bankruptcy, Rule 7024,7 in this adversary proceeding. Chittenden initially objected to the Trustee's intervention motion; however, it withdrew its objection and the Court granted the Trustee permission to intervene. (April 1, 1986 transcript, page 55). We then ordered that the Trustee's petition to marshal assets, as a hypothetical judicial lien creditor under 11 U.S.C. § 544,8 consolidated with the instant adversary proceeding.
Sebert, as the named defendant in Chittenden's declaratory action, also timely raised the doctrines of marshaling and piercing the corporate veil as affirmative defenses.9 After the Trustee's intervention, however, Sebert's attorney assumed the role of pursuing these affirmative defenses on behalf of the Trustee for the benefit of Debtor's estate.10 (June 27, 1986 transcript, pages 36-39). Chittenden timely preserved its objections to the Trustee's standing to marshal and pierce Debtor's veil, albeit through Sebert's attorney's prosecution. (April 1, 1986 transcript, page 57; June 18, 1986 transcript pages 2-3; June 26, 1986 transcript page 50; June 27, 1986 transcript pages 32-39).
This proceeding was tried, briefed, and reserved for decision.11
1. Debtor, Vermont Toy Works, Inc., filed its Articles of Incorporation with the Vermont Secretary of State. Debtor's Certificate of Incorporation was issued by that Office on May 31, 1979, (Sebert's Exhibit # 37, page 1; June 19, 1986 transcript, page 32), and stated as some of its corporate purposes:
(a). To design, develop and manufacture products and sell such products and other products made by others and to engage in distribution of items to wholesale and retail trade.... (c). To borrow money without limitation as to amount of corporate indebtedness or liability.
2. Debtor, a closed family Sub-Chapter S corporation, (June 18, 1986 transcript, pages 104-105; June 27, 1986 transcript, page 83), engaged in the manufacturing of finished wood products, and had three directors who also served as its officers: Gordon Winer, Chairman of the board of directors, and president, (April 1, 1986 transcript, page 16); David Winer, Gordon Winer's father, vice president, (Exhibit C-4; April 1, 1986 transcript, page 12); and, Janet Winer, David Winer's spouse, treasurer, (Exhibit 37, page 11).
3. David Winer is Debtor's sole shareholder. David Winer's total equity (capital) contribution to the Debtor is $10,000.00. (June 18, 1986 transcript, page 59; Exhibit 37, pages 13-14; Exhibit C-3).
4. On November 15, 1984, Debtor executed two demand collateral notes: a $98,562.00 purchase money note for additional equipment; and, a $50,000.00 working capital note. (April 1, 1986 transcript, page 13). Both notes were in favor of Chittenden. (Exhibit 1, pages 6, 7).
5. The $98,562.00 demand note pledged the following described property as collateral:
MORTGAGE DEED DATED 11/15/84 and Security Agreement dated 11/15/84 including all machinery and equipment and any attachments or replacements thereof, all inventory, accounts receivable, contracts entered into or contract rights, etc., assigned STOCKS AND BONDS AND life insurance policy.
(Exhibit 1, page 6) (emphasis ours).
The above emphasized words, "Mortgage Deed dated 11/15/84 and," and, "stocks and bonds and," were struck and initialed by Debtor's president and Chittenden's inhouse attorney. (Exhibit 1, page 6).
6. The $50,000.00 demand note pledged the following described property as collateral:
Security Agreement dated 11/15/84 including all machinery and equipment and any attachments (sic) or replacements thereof, all inventory, accounts receivable, contracts entered into or contract rights, etc., ASSIGNED STOCKS AND BONDS AND life insurance policy.
(Exhibit 1, page 7) (emphasis ours).
The above emphasized words, "assigned stocks and bonds and," were struck and replaced with the word "assigned" and initialed by Debtor's president and Chittenden's in-house attorney. (Exhibit 1, page 7).
7. At Chittenden's request, the two original notes were subsequently replaced by two new notes, which were then back dated to November 15,...
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