In re Wolverine

Citation447 B.R. 1
Decision Date21 January 2011
Docket NumberAdversary No. 07–1179.,Bankruptcy No. 06–10815–JNF.
CourtUnited States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts
PartiesIn re WOLVERINE, PROCTOR & SCHWARTZ, LLC, Debtor.Lynne F. Riley, Chapter 7 Trustee of Wolverine, Proctor & Schwartz, LLC, Plaintiffv.Tencara, LLC, Defendant.

447 B.R. 1

In re WOLVERINE, PROCTOR & SCHWARTZ, LLC, Debtor.Lynne F. Riley, Chapter 7 Trustee of Wolverine, Proctor & Schwartz, LLC, Plaintiff
v.
Tencara, LLC, Defendant.

Bankruptcy No. 06–10815–JNF.

Adversary No. 07–1179.

United States Bankruptcy Court, D. Massachusetts.

Jan. 21, 2011.


[447 B.R. 4]

Annapoorni Sankaran, Greenberg Traurig LLP, Houston, TX, for Debtor.

MEMORANDUM
JOAN N. FEENEY, Bankruptcy Judge.I. INTRODUCTION

The matter before the Court is the Second Amended Complaint filed by Lynne F. Riley, the Chapter 7 Trustee (the “Trustee”) of the Debtor, Wolverine, Proctor & Schwartz, LLC (the “Debtor”), on July 16, 2009. Prior to the filing of her Second Amended Complaint, the Court, on May 22, 2009, denied the Motion for Summary Judgment filed by the Defendant, Tencara, LLC (“Tencara”), a Delaware limited liability company. Tencara subsequently moved to dismiss Count IV of the Trustee's Second Amended Complaint (the “Complaint”), through which the Trustee sought to equitably subordinate its claim to the claims of other creditors pursuant to 11 U.S.C. § 510(c). The Court heard the Motion to Dismiss and the Trustee's Opposition on October 14, 2009, and subsequently denied that motion.

The Court conducted a trial on May 24, 2010, May 25, 2010, May 26, 2010, May 27, 2010, June 2, 2010, June 7, 2010 and July 6, 2010 with respect to the four counts set forth in the Complaint, namely Count I–Recharacterization of Debt as Equity; Count II–Objection to Claim, Count III–Avoidance of Lien, and Count IV–Equitable Subordination of Debt Pursuant to 11 U.S.C. § 510(c). At the trial seven witnesses testified and forty-three exhibits were admitted into evidence. The issues presented include whether Tencara is an “insider” of the Debtor, whether its debt incurred on February 11, 2005 should be recharacterized as equity, and whether it engaged in conduct warranting the equitable subordination of its secured claim to the claims of all other creditors of the Debtor's bankruptcy estate.

The Court has jurisdiction over the Complaint pursuant to 28 U.S.C. §§ 157(b)(2)(B) and (K), and 1334(b). The Court now makes its findings of fact and rulings of law in accordance with Fed. R. Bankr.P. 7052

II. FACTSA. The Debtor's Bankruptcy Case

The Debtor, a Delaware limited liability company, filed a voluntary Chapter 7 petition

[447 B.R. 5]

on April 1, 2006, together with its Schedules of Assets and Statement of Financial Affairs. On its Summary of Schedules, it initially disclosed total assets valued at $3,100,889.00 and total liabilities of $6,554,601.24. The Debtor amended its Schedules and Statement of Financial Affairs on May 23, 2006, increasing both the value of its assets and the amount of its debt to $3,921,390.50 and $6,645,092.74, respectively.1 On both its original and amended Schedule D–Creditors Holding Secured Claims, it listed Tencara as the holder of a fully secured, non-contingent, liquidated and undisputed claim in the sum of $1,900,000.00.

On July 31, 2006, Tencara timely filed a proof of claim, seeking:

no less than the Petition Date Principal Amount, plus all accrued and owing fees, charges and interest permitted under the Secured Promissory Note and Security Agreement, including, without limitation, all of Tencara's attorneys [sic] fees and costs purusant to Section 4.3 of the Note and a Prepayment Premium equal to three percent (3%) of the outstanding principal balance in the event of prepayment of the Note pursuant to Section 2.4 of the Note.

In its proof of claim, it asserted that it was owed $1,896,476.67 as of the petition date. The Debtor was not in default with respect to Tencara's Secured Promissory Note and Security Agreements as it had timely made all interest payments due and owing under the note.

The Court's Claims Register and the ultimate determination of allowed claims reveals that the total amount of unsecured claims filed in the case equaled $40,892,852.10, that the total amount of secured claims, including Tencara's claim, equaled $2,731,710.21, and that the total amount of priority claims equaled $2,468,586.44. Thus, the Debtor's initial assessment of its outstanding prepetition obligations proved to be grossly inaccurate. For example, although the Debtor listed numerous individuals as the holders of contingent, unliquidated, and disputed “[p]otential employee benefits claims” in unknown amounts, the Debtor did not list the Pension Benefit Guaranty Corporation (“PBGC”) as the holder of either priority or unsecured claims. On May 5, 2009, this Court granted the Trustee's Motion to Approve Settlement Agreement Regarding Pension Benefit Guaranty Corporation Claims pursuant to which the Trustee proposed the allowance of a priority, unpaid minimum contribution claim of $50,000.00, an unsecured, unfunded benefit liabilities claim of $8,399,500.00, as well as an unsecured plan premiums claim in the sum of $101,084.25. See In re Wolverine Proctor & Schwartz, LLC, No. 06–10815, 2009 WL 1271953 (Bankr.D.Mass. May 5, 2009), aff'd, 436 B.R. 253 (D.Mass.2010). The allowed claims of the PBGC alone exceeded the Debtor's statement of its total liabilities in its Amended Schedules by almost two million dollars.

The Debtor also did not provide an accurate assessment of its assets in its Schedules. Three weeks after the commencement of the Debtor's case, the Trustee filed a Motion (I) to Sell Assets of the Debtor Free and Clear of Liens, Claims and Encumbrances, and (II) to Assume and Assign Leases and Contracts pursuant to which she proposed to sell substantially all of the Debtor's assets to Tencara for a purchase price consisting of (i) a payment of $150,000; (ii) a credit bid of Tencara's

[447 B.R. 6]

secured claim in the amount of $1,900,000; (iii) a credit bid of sums to be advanced under a proposed postpetition financing up to a maximum of $400,000; (iv) a credit bid of $50,000 for legal fees and other costs relating to Tencara's secured debt and due diligence costs in connection with the asset purchase agreement, and (v) cure costs. On April 25, 2006, the Court denied the motion.2

Subsequently, on May 31, 2006, the Trustee filed a Motion to Sell Substantially All of the Assets of the Debtor Free and Clear of Any Liens, Claims, Interests and Encumbrances, through which she proposed to sell all the Debtor's assets to Aeroglide Corporation (“Aeroglide”) or a successful bidder. Following the filing of the Motion to Sell, the Trustee and Tencara entered into a Stipulation pursuant to which Tencara agreed that the Trustee could use up to $75,000 of Tencara's deposit paid in connection with its April 20, 2006 offer to purchase the Debtor's assets for expenses in exchange for a postpetition lien and security interest, payable from the proceeds of the proposed sale to Aeroglide.

On June 28, 2006, the Court conducted an auction of the Debtor's assets. The successful bidder was CPM Holdings who submitted a bid in the sum of $8,200,000, plus additional consideration of $500,000 in connection with a settlement of a license dispute with the Debtor's affiliate in the United Kingdom. Thus, the Trustee sold the Debtor's assets for approximately $6,000,000 more than the proposed sale to Tencara and $3,000,000 more than the value the Debtor ascribed to its assets in its Schedules of Assets.

In its Statement of Financial Affairs, the Debtor disclosed the following pertinent information with respect to its ownership—information which was also adduced at trial:

+-----------------------------------------------------------------------------+
                ¦ ¦ ¦NATURE AND PERCENTAGE ¦
                +-------------------------+--------------------+------------------------------¦
                ¦NAME ¦TITLE ¦OF STOCK OWNERSHIP ¦
                +-------------------------+--------------------+------------------------------¦
                ¦Deepak Kulkarni ¦Managing Member, ¦100% common ¦
                +-------------------------+--------------------+------------------------------¦
                ¦ ¦Shareholder ¦ ¦
                +-------------------------+--------------------+------------------------------¦
                ¦Mark Brown ¦President ¦0 ¦
                +-------------------------+--------------------+------------------------------¦
                ¦Parthenon Investors II, ¦Preferred ¦100% preferred ¦
                ¦LP ¦Shareholder ¦ ¦
                +-------------------------+--------------------+------------------------------¦
                ¦PCIP Investors ¦Preferred ¦100% preferred ¦
                ¦ ¦Shareholder ¦ ¦
                +-------------------------+--------------------+------------------------------¦
                ¦J & R Founders Fund, LP ¦Preferred ¦100% preferred ¦
                ¦ ¦Shareholder ¦ ¦
                +-------------------------+--------------------+------------------------------¦
                ¦Tencara, LLC ¦Warrant Holder ¦Warrants for 10% ¦
                +-----------------------------------------------------------------------------+
                
Tencara held warrants for common units. The Court notes that equity owners of limited liability companies generally are referred to as members. The members of limited liability companies typically hold units as opposed to shares of stock. The parties used the terms units and stock interchangeably, and the Court will adopt the terms utilized by the parties.

[447 B.R. 7]

Deepak Kulkarni (“Kulkarni”) signed the Certificate of Resolution authorizing the commencement of the Debtor's Chapter 7 case as “Member” and as “Manager,” although the petition itself was signed by Mark Brown (“Brown”) as President.3 In addition to his role as Managing Member and sole common stockholder of the Debtor, Kulkarni owned Remedial Capital, LLC (“Remedial”), an entity which purchased distressed companies. Phillip Constable (“Constable”) worked with him at Remedial. Both Kulkarni and Constable were employed by Bain and Company prior to the events precipitating the Trustee's Complaint.

As noted above, Tencara held warrants for 10 % of the Debtor's common units at the commencement of the case. David Callan (“Callan”) is the sole member and manager of Tencara, as well as the sole member and manager of Continental Asset Management. Callan testified that he uses both Tencara and Continental...

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