Jahn v. Bacon (In re E. Tech Co.)
| Decision Date | 25 March 2015 |
| Docket Number | No. 14–10532,Adversary Proceeding No. 14–1076,14–10532 |
| Citation | 528 B.R. 743 |
| Parties | In re: East Tech Company, Debtor; Richard P. Jahn, Jr., Trustee, Plaintiff v. Pryor Bacon, Jr. and Pryority Partnership, Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Tennessee |
Appearances for Richard P. Jahn, Trustee, David L. Moss, Fields & Moss, P.C., 1200 Mountain Creek Road, Suite 260, Chattanooga, TN 37405
Appearances for Pryor Bacon, Jr. and Pryority Partnership, Elizabeth B. Donnovin, Johnson & Mulroony PC, 428 McCallie Avenue, Chattanooga, TN 37402
Pursuant to Federal Rule of Civil Procedure 12(b)(6), incorporated into adversary proceedings by Federal Rule of Bankruptcy Procedure 7012(b), defendants Pryor Bacon, Jr. (“Bacon”) and Pryority Partnership (“Pryority”) (collectively “Defendants”) move to dismiss the complaint (“Complaint”) filed by plaintiff trustee Richard P. Jahn (“Plaintiff” or “Trustee”) in this adversary proceeding. [Doc. No. 8].1 The Trustee opposes the motion. [Doc. No. 10].
The Trustee's Complaint seeks a determination from this court pursuant to 11 U.S.C. § 362 that the Defendants violated the automatic stay. It further seeks a judgment for all actual damages caused by the alleged violation of the stay, as well as punitive damages. The Trustee also asks the court to determine the fair market value of the use of the real estate at issue, offset that amount against any damages award and subordinate the remaining administrative claim of Pryority pursuant to 11 U.S.C. § 510(c). See [Doc. No. 1, Complaint].
The court has reviewed the briefing of the parties and the relevant caselaw and makes the following findings of fact and conclusions of law pursuant to Fed. R. Bankr. P. 7052. The court will deny the Defendants' motion to dismiss.
Although the Defendants dispute many of the facts alleged in the Trustee's Complaint in footnotes made in their briefing, the court must view the facts to be as alleged by the Trustee in his Complaint in considering the Defendants' motion to dismiss the Complaint. The court may also review the undisputed facts of the case based on the records filed in the main case relating to the debtor East Tech Company (“Debtor” or “East Tech”). The Debtor filed its voluntary Chapter 11 bankruptcy petition on February 10, 2014. [Bankr. Case No. 14–10532, Doc. No. 1]. The Debtor was a corporation that operated a precision machine shop in a 30,000 square foot warehouse located on River Terminal Road in Chattanooga, Tennessee. See [Bankr. Case No. 14–10532, Doc. No. 93, Schedule A]. The operations used numerous sizeable machines and pieces of equipment. In its Schedule B, filed with the bankruptcy petition, the Debtor listed its machinery and equipment as having a valuation of $1,907,911.78. [Bankr. Case No. 14–10532, Doc. No. 94, p. 4, Schedule B]. The machinery and equipment listed in the Debtor's Schedule B includes such items as cutoff saws, banksaws, sander, vises, compressor, newturn mill, newturn lathe, tooling shop tables, appliances, drills, compressors, and welders. Id. The Debtor operated as a debtor-in-possession until August 28, 2014 when the Trustee was appointed. [Bankr. Case No. 14–10532, Doc. No. 178].
The Defendant Pryor Bacon has several years of realtor and broker experience and owns and leases a number of commercial real estate properties in Chattanooga. Complaint, ¶ 2. The other Defendant Pryority is the owner of real estate located at 3115 Freeman Avenue in Chattanooga, Tennessee. The Trustee alleges that Bacon owns or is a general partner of Pryority. Id. See also, [Doc. No. 10, Trustee's Objection/Response to Defendants' Motion to Dismiss, p. 15]. Approximately a month before the Trustee was appointed, the Debtor and Pryority reached an agreement for Pryority to lease space on the Freeman Road Property to the Debtor when the Debtor was required to move from its space on River Terminal Road. It is this lease that is at the center of this dispute.
CapitalMark Bank & Trust (“CapitalMark”) is a creditor of the Debtor that holds two promissory notes secured by a lien on the accounts, equipment and inventory of the Debtor. On June 26, 2014, CapitalMark filed a motion for abandonment and for relief from the automatic stay. [Bankr. Case No. 14–10532, Doc. No. 144]. On July 25, 2014 the court entered an agreed order resolving CapitalMark's motion for abandonment and for relief from the stay. [Bankr. Case No. 14–10532, Doc. No. 151]. In the court's order the Debtor agreed to numerous provisions, including that “[a] copy of the lease agreement for the space where the Business will be moving and operating after July 31, 2014, and a waiver from the landlord of any landlord's lien on the Collateral” would be provided to CapitalMark by July 25, 2014 at 5:00 p.m. Id. at p. 3. In addition, the Debtor agreed in Paragraph 13 of the agreed order that “[n]o later than August 7, 2014 at 5:00 p.m., all of the machinery and equipment of the Debtor shall be operational and ready to conduct business.” Id. at p. 4. The order provided that if the Debtor did not provide a copy of the lease agreement to CapitalMark by the stated deadline, “the automatic stay provisions of 11 U.S.C. § 362 [would be] terminated effective as of 12:01 a.m. on July 26, 2014, and the Collateral [would be] deemed abandoned pursuant to 11 U.S.C. § 554.” The order further provided that if the deadlines set forth in Paragraph 13 were not met, “the automatic stay provisions of 11 U.S.C. § 362 are terminated effective as of 12:01 a.m. on the date following the date that such conditions should have been met, and the Collateral is deemed abandoned pursuant to 11 U.S.C. § 554.” Id.
The Complaint alleges that in August of 2014 the Debtor moved its operations from the River Terminal Road space to a warehouse located at 3115 Freeman Avenue, an 80,000 square foot building that Pryority owned in Chattanooga, Tennessee (the “Premises”). Complaint, ¶ 5. The Debtor was no longer operating and most of its employees had quit by September 2, 2014. Id. The Trustee alleges that the Premises were in “general disarray” at that time. Id. The Trustee contends that although the Debtor's equipment had been moved to the Premises and the Debtor and Pryority were negotiating a lease, they had not entered into a written lease. No court approval had been requested for the entry into a lease with Pryority.
On August 28, 2014 the United States Trustee filed a Notice of the Appointment of the Trustee. [Bankr. Case No. 14–10532, Doc. No. 178]. On the same day, the court entered an order granting the motion to appoint a trustee. [Bankr. Case No. 14–10532, Doc. No. 180]. On September 4, 2014, the court entered an agreed order providing that the Trustee and CapitalMark had agreed to modify the court's order dated July 25, 2014. [Bankr. Case No. 14–10532, Doc. No. 188]. The September 4th agreed order provided in part that:
The Debtor did not pay the interest payment required by that order by September 1, 2014, and it is in default in the terms of that order for that reason and possibly other reasons. The Trustee believes there is equity in the Bank's collateral which consists primarily of the Debtor's equipment. The Bank is agreeable to giving the Trustee a certain time to sell the equipment, provided that its collateral is protected and its debt is paid first out of the proceeds of sale.
Id. On October 9, 2014, the court entered an order approving an auction sale of the Debtor's equipment assets on November 18, 2014. [Bankr. Case No. 14–10532, Doc. No. 206].
The Trustee began to entertain offers from public auction companies regarding conducting an auction sale of the Debtor's equipment on the Premises. Complaint, ¶ 9. The Complaint states that the Trustee struggled to pay essential expenses of the estate during September of 2014 to get assets ready for sale. Id. at ¶ 10. The Trustee asserts that Bacon was Pryority's agent and that he met with Bacon on the Premises on September 5, 2014. Id. at ¶ 11. The Trustee asserts that he informed Bacon of the following:
He reported that the Debtor had no funds to pay creditors at this time. None of the contractors who had moved the Debtor's equipment the month before had been paid. He told Bacon that many employees and current creditors, including Defendant Bacon, had been left in the lurch by the Debtor. The Trustee informed Bacon that the Bank had given the Trustee 75 days to have an auction sale; that the Trustee planned to pay administrative creditors as soon as possible after the sale; and that a sale should take place around mid-November.
Complaint, ¶ 11. The Trustee contends that Bacon appeared to be helpful and cooperative at that time. With respect to the terms of the unwritten lease, the Trustee asserts that the Debtor informed him that Bacon had agreed to rent of $7,866 per month beginning in 2015 with the first four months of the Debtor's occupancy of the Premises to be free. Id. at ¶ 13. The Trustee and Bacon did not discuss rental terms during the month of September 2014. Id.
In late September of 2014, Bacon provided the Trustee with three invoices from Pryority listing an amount of $7,866 each relating to August, September and October 2014 rent. Complaint, ¶ 14. He further provided an invoice for $8000 for work allegedly completed on the Premises prior to the Debtor's occupancy. Id. The Trustee filed the bills away as he did not have funds to pay them at that time.
The Trustee managed to negotiate an acceptable contract for the public auction of the Debtor's equipment with the Branford Group (“Branford”), which guaranteed the estate a minimum of $825,000 for the equipment sale. Complaint, ¶ 15. An amount that high would allow the Trustee to pay all of the Chapter 11 administrative expenses, including the expense of rent for the Premises. The Trustee agreed to allow Branford “unfettered access to the Premises to...
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