In re Worldwide Wholesale Lumber, Inc.

Decision Date21 May 2007
Docket NumberBankruptcy No. 06-01499-JW.,Adversary No. 07-80008-JW.
Citation372 B.R. 796
CourtU.S. Bankruptcy Court — District of South Carolina
PartiesIn re WORLDWIDE WHOLESALE LUMBER, INC., Debtor. Michelle L. Vieira, Plaintiff, v. AGM II, LLC and Lancelot Investor Fund, L.P. d/b/a Surge Capital, Defendants.

Richard L. Tapp, Jr., Nexsen Pruet, LLC, Charleston, SC, for Plaintiff.

Suzanne Taylor Graham Grigg, Nexsen Pruet Adams Kleemeier, LLC, Columbia, SC, for Plaintiff/Trustee.

Charles Pelot Summerall, IV, Buist, Moore, Smythe & McGee, PA, Charleston, SC, John Robert Weiss, Duane Morris LLP, Chicago, IL, for Defendants.

ORDER

JOHN E. WAITES, Bankruptcy Judge.

This matter is before the Court upon the Motion of AGM, II, LLC and Lancelot Investor Fund, L.P. ("Defendants") to dismiss the amended complaint filed by Michelle L. Vieira, as Chapter 7 Trustee ("Trustee") for Worldwide Wholesale Lumber, Inc. ("Debtor"), pursuant to Fed. R.Civ.P. 12(b)(1) and (6). The Court makes the following Findings of Fact and Conclusions of Law pursuant to Federal Rule of Civil Procedure 52, made applicable to this proceeding pursuant to Federal Rule of Bankruptcy Procedure 7052.1

FINDINGS OF FACT

1. Prior to the petition date, Debtor operated as a distributor of lumber. AGM was the lender for Debtor and lent money based upon Debtor's inventory in exchange for a security interest in the same. AGM and Debtor entered into a Master Financing Agreement, dated June 22, 2005, to evidence this relationship.

2. Debtor's bankruptcy case was commenced on April 12, 2006 when creditors of Debtor, other than AGM, filed an involuntary petition under chapter 7 with this Court.

3. Debtor consented to an order of relief under chapter 7 and an order of relief was entered on April 18, 2006.

4. Trustee was appointed as the chapter 7 trustee in Debtor's case.

5. On April 24, 2006, AGM sought relief from the automatic stay on an expedited basis so that it could foreclose on its security interest in its collateral held by Debtor.

6. A hearing on the Motion for Relief from the Automatic Stay was held on April 28, 2006. The parties negotiated during a lengthy recess and agreed to consent to the order granting AGM relief from the automatic stay under specified conditions, which were read into the record by the Trustee. The parties agreed that the goods needed to be promptly sold because the value of the goods was rapidly decreasing as a result of deterioration and the accrual of liens. The Court entered an oral ruling granting AGM relief from the automatic stay under the terms specified by the parties.2

7. On April 28, 2006, AGM conducted a public auction pursuant to Article 9-610 of the Uniform Commercial Code. AGM was the successful bidder at the sale with its credit bid of $1 million.

8. Following the sale of goods held by Debtor, AGM deposited with Trustee all proceeds of the sale, including proceeds from the goods sold following AGM's purchase of the goods at the UCC sale. In all, AGM escrowed approximately 84,356,849.00 with Trustee.

9. On May 26, 2006, and subsequently on July 6, 2006, AGM filed its first and second amended proofs of claim, respectively, asserting $5,619,301.85 as the amount of its claim.3 AGM's claim asserts that it is a creditor secured by an interest in certain assets of Debtor.

10. On June 13, 2006, AGM filed a motion to allow its proof of claim and compel payment thereof ("Allowance Motion"). AGM's Allowance Motion sought to allow its proof of claim and compel Trustee to promptly and indefeasibly pay the claim.

11. Trustee filed a return to AGM's Allowance Motion on June 26, 2006. Trustee opposed the Allowance Motion on grounds that AGM possessed all relevant corporate records to determine the amount of the claim. Trustee also stated in her return that it was too soon to allow payment of the claim as there may be outstanding issues of subordination and priority to be resolved. Trustee did not affirmatively request that the Court subordinate or determine the priority of AGM's claim.

12. On June 30, 2006, Trustee wrote the Court regarding the discovery needed for the Allowance Motion. Trustee suggested the Court include Wells Fargo and the Chinese Mills in the discovery process so that "issues of claim allowance and subordination could be litigated in a single proceeding." Trustee estimated it would take several months to complete discovery and have the matter prepared for trial.

13. On June 30, 2006, after receiving the letter from Trustee and consulting with the other parties to this matter, the Court entered a scheduling order on the Allowance Motion. The scheduling order required the parties to complete discovery by September 20, 2006 and set a pretrial hearing on the motion for October 5, 2006.

14. On July 21, 2006, Jiaxing Hengtong Wood Co., Ltd., Tianjin Jinnan Dist., Tongmei Timber Co., Wenan Xinda Wood Industry Co. Ltd., and Zaozhuang Hongrun Wood Co., Ltd. (collectively the "Chinese Mills") objected to the Allowance Motion on grounds that there was insufficient information to allow the claim and that parties may have claims against AGM. The Chinese Mills did not seek affirmative seek relief against AGM and later withdrew its objection.

15. Trustee filed a motion to extend time to complete discovery on September 19, 2006 on grounds that AGM provided Trustee with relevant documents shortly before the discovery deadline and Trustee was unable to review these documents because of the massive quantity of documents produced.4

16. AGM opposed Trustee's motion to extend time on grounds that it cooperated in discovery and that Trustee was seeking to alter the scope of the trial on the Allowance Motion by excluding issues regarding any subordination claim that Trustee may have against AGM. AGM's response indicated that the Allowance Motion was "an invitation" to litigate all issues concerning AGM's claim.5

17. On September 27, 2006, the Court, over AGM's objection, amended the scheduling order to provide Trustee with an additional month to complete discovery.

18. Prior to the trial on the Allowance Motion, Trustee filed a motion in limine to exclude evidence regarding whether AGM's claim should be subordinated or reclassified. On January 5, 2007, the Court denied Trustee's motion in limine without prejudice holding "issues of subordination, priority, lender liability or reclassification have not been pled and therefore are not expressly before this Court in this contested matter. To the extent that evidence bears upon these issues, the Court will not make a ruling as to whether the Trustee is entitled to such relief or whether such relief is barred based upon defenses alluded to by AGM."

19. A trial on the Allowance Motion was held on January 8, 2007. Trustee and AGM each submitted evidence regarding the calculation of AGM's claim. On February 12, 2007, the Court entered an order granting in part and denying in part the Allowance Motion. In the February 12, 2007 order ("Allowance Order"), the Court found:

a. AGM has an allowed claim in the amount of $3,866,460.85;6 b. Prior to the petition, AGM obtained a perfected security interest in all of the tangible and intangible assets of Debtor, including inventory and the proceeds thereof;

c. Trustee should turnover all funds escrowed with her by AGM because such funds where either property of AGM, as proceeds from collateral AGM purchased at a UCC sale, or fully encumbered by AGM's security interest.

20. Trustee timely filed a motion to alter or amend the Allowance Order pursuant to Fed.R.Civ.P. 59(e).

21. On March 12, 2007, AGM filed a motion to compel Trustee to comply with the Allowance Order by paying to AGM the funds held in escrow by Trustee.

22. Trustee opposed the motion to compel on grounds that her motion under Fed.R.Civ.P. 59(e) suspended the finality of the Allowance Order and the Court should otherwise stay the turnover of funds to AGM based upon AGM's prepetition conduct.

23. The Court granted AGM's motion to compel on April 6, 2007 finding that Trustee's motion to alter or amend did not stay the Allowance Order, that Trustee did not seek a stay of the Allowance Order under recognized procedure for staying an order, and that the Allowance Order should not otherwise be stayed based upon unproven allegations. Trustee withdrew her motion to alter or amend the Allowance Order following the entry of the order compelling Trustee to comply with the Allowance Order.

24. Trustee did not appeal the Allowance Order, which stands as a final order on the allowance of AGM's claim.

25. On January 22, 2007, this adversary was referred to this Court from the United States District Court for the District of South Carolina. Trustee's original complaint requested relief only against AGM under causes of action for breach of fiduciary duty as to Debtor and other creditors and sought equitable relief under theories of constructive trust and accounting.

26. AGM filed a motion to dismiss the original complaint pursuant to Fed. R.Civ.P. 12(b)(6) or, in the alternative, for a more definite statement.

27. The Court entered an order in this adversary on February 28, 2007 denying AGM's motion to dismiss but requiring Trustee to amend her complaint to set forth in more detail facts supporting her complaint.

28. On February 12, 2007, after the entry of the Allowance Order, Trustee filed a second adversary (Adv.Pro. No. 07-80013) against AGM and Lancelot seeking to equitably subordinate or reclassify any claim held by these parties.

29. On March 14, 2007, Trustee filed an amended complaint now at issue. The amended complaint contains the causes of action in the original complaint as well as those actions contained in the second adversary proceeding and a cause of action under 11 U.S.C. § 547.7 The general theory...

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