Knight v. Caribbean Auto Mart of St. Croix, Inc. (In re Caribbean Auto Mart of St. Croix)

• Decision Date: 11 June 2021
• Docket Number: Case No. 13-10003 (MFW),Adv. No. 18-01001 (MFW)
• Parties: In re: CARIBBEAN AUTO MART OF ST. CROIX, INC. Debtor. ANNELLE KNIGHT, ESTHER NEWTON, FITZROY WILLIAMS, PAULINE PETER, JANET RIVERA, RAMS AUTO REPAIR, DEREK CAMBRIDGE, ASHEEM CHARLES, MONIQUE XAVIER, MICHAEL FELIX, BERNARD HAMILTON, and LEON RICHARDSON, Plaintiffs, v. CARIBBEAN AUTO MART OF ST. CROIX, Inc., CAG INTERNATIONAL, INC., d/b/a CARIBBEAN AUTO GROUP, Defendant.
• Court: U.S. District Court — Virgin Islands, Bankruptcy Division

In re: CARIBBEAN AUTO MART OF ST. CROIX, INC. Debtor.ANNELLE KNIGHT, ESTHER NEWTON, FITZROY WILLIAMS, PAULINE PETER,JANET RIVERA, RAMS AUTO REPAIR, DEREK CAMBRIDGE, ASHEEM CHARLES,MONIQUE XAVIER, MICHAEL FELIX, BERNARD HAMILTON, and LEON RICHARDSON, Plaintiffs, v. CARIBBEAN AUTO MART OF ST. CROIX, Inc., CAG INTERNATIONAL, INC.,d/b/a CARIBBEAN AUTO GROUP, Defendant.

Case No. 13-10003 (MFW)

Adv. No. 18-01001 (MFW)

DISTRICT COURT OF THE VIRGIN ISLANDS BANKRUPTCY DIVISION ST. CROIX, VIRGIN ISLANDS

June 11, 2021

Chapter 7

Rel. Docs. 40, 58, 60

OPINION¹

Before the Court is the Motion for Summary Judgment filed by the Defendant, CAG International, Inc., d/b/a Caribbean Auto Group ("CAG"). The dispute is whether CAG, the non-debtor parent of Caribbean Auto Mart of St. Croix (CAMSTX) (the "Debtor"), disregarded corporate entity separateness, pre-petition,warranting substantive consolidation of CAG and the Debtor. The Plaintiffs oppose the Motion.² For the reasons stated below, the Court will grant CAG's Motion.

I. BACKGROUND

A. Factual History

On March 5, 2001, three individuals, William Lambert, Charles Lambert, and Sydne Hilton (collectively, the "Initial Shareholders") incorporated the Debtor, a car dealership on St. Croix, U.S. Virgin Islands, for the purpose of acquiring the assets of an existing automobile dealership and leasing a commercial facility upon which to operate a General Motors franchise. (Adv. D.I. 40, at Ex. A ¶¶ 1.1 & 1.2.)³ Between 2001 and 2007, the Initial Shareholders incorporated several other entities. (Id., at Ex. A ¶¶ 1.1, 5.2, 5.3, & 5.6.) These entities included two real estate investment vehicles: Triple C Inc. ("Triple C") and CT Real Estate Investments Inc., and five dealerships: (i) Lambert Hilton Inc., d/b/a Toyota of St. Thomas;(ii) Caribbean Auto Mart, Inc. (St. Thomas); (iii) Lambert Brothers Inc., d/b/a Toyota of St. Croix; (iv) Chrysler-Dodge-Jeep of St. Croix, Ltd.; and (v) the Debtor. The Initial Shareholders collectively owned 100% of the stock in each corporation and were the only directors on their respective boards. (Id.)

On January 2, 2007, CAG was incorporated to serve as the parent holding company for the seven corporations. The Initial Shareholders contributed their stock in each of the seven entities to CAG in exchange for their pro rata share of CAG's stock. (Id., at Ex. A ¶¶ 5.5 & 5.6; Adv. D.I. 58, at Ex. 29A.)

The Plaintiffs are unsecured creditors holding tort and/or contract claims against the Debtor including claims for wrongful termination, sale of defective vehicles, fraud, failure to maintain leased property in good repair, breach of good faith and fair dealing, breach of implied contract of employment, and fraudulent misrepresentations in insuring and financing vehicles. None of the Plaintiffs' claims have been reduced to judgment.

B. Procedural History

On March 5, 2013 (the "Petition Date"), the Debtor filed a voluntary petition under chapter 7. On November 2, 2013, the chapter 7 trustee (the "Trustee") filed a Report of No Distribution. The U.S. Environmental Protection Agency ("EPA") filed an objection to the Trustee's Report on November 20, 2013,and sought discovery to determine whether there was any basis for a cause of action against the Debtor and non-debtor parent, CAG, for fraudulent transfers, substantive consolidation, or piercing the corporate veil. (D.I. 59.) The Plaintiffs joined in the EPA's objection. (D.I. 63.) The Court granted the EPA's discovery request (allowing the Plaintiffs to participate). Following discovery, the EPA, the Debtor, and CAG filed a motion for approval of a settlement agreement, which the Court granted on August 17, 2016. (D.I. 158 & 164.) Thereafter, the Plaintiffs filed a motion for discovery under Rule 2004 of the Federal Rules of Bankruptcy Procedure on the grounds that the EPA had not finished reviewing documents and had not conducted any depositions. (D.I. 165.) On February 9, 2017, the Court allowed the Plaintiffs to conduct limited discovery (namely, depositions). (D.I. 174.)

On March 16, 2018, the Plaintiffs filed a complaint alleging that the Debtor, CAG, and CAG's majority shareholder, William Lambert, ought to be substantively consolidated either because: "(i) pre-petition, [the entities] disregarded separateness so significantly their creditors relied on the breakdown of entity borders and treated them as one entity, or (ii) post-petition, their assets and liabilities are so scrambled that separating them is prohibitive and hurts all creditors." (Adv. D.I. 1.) In re Owens Corning, 419 F.3d 195, 211-12 (3d Cir. 2005).Alternatively, the Plaintiffs sought to pierce the corporate veil under the alter ego theory. (Adv. D.I. 1.) The Defendants filed motions to dismiss. (Adv. D.I. 22 & 23.)

After a hearing on February 14, 2019, the Court dismissed all claims against William Lambert because the complaint failed to allege that the Plaintiffs viewed Lambert as the Debtor's alter ego and dismissed all claims against CAG except the claim for substantive consolidation under the first test articulated in the Owens Corning decision. (Adv. D.I. 31 & 34.) The Court cautioned, however, that there is a high bar for proving substantive consolidation with a non-debtor. (Id.)

The Plaintiffs thereafter filed an amended complaint (the "Amended Complaint"). (Adv. D.I. 35.) CAG responded with its Motion for Summary Judgment on May 28, 2020. (Adv. D.I. 40.) The Plaintiffs filed their Opposition on August 24, 2020, and CAG filed its Reply on September 8, 2020. (Adv. D.I. 58 & 60.) Briefing is complete, and the matter is now ripe for decision.

II. JURISDICTION

The Court has subject matter jurisdiction over this adversary proceeding, which is a core proceeding concerning the administration of the estate and liquidation of its assets. 28 U.S.C. §§ 1334(b), 157(b)(2)(A) & (O).

The Court has authority to render a final judgment if the parties consent. See Wellness Int'l Network, Ltd. v. Sharif, 575 U.S. 665, 683-85, 685 n.13 (2015) (holding that even if the bankruptcy court lacks constitutional authority to enter a final order, the parties can consent to a final order expressly or implicitly); In re Tribune Media Co., 902 F.3d 384, 396 (3d Cir. 2018) (holding that the claimant impliedly consented to entry of a final order by the bankruptcy court, where he filed several pleadings without objection to the court's authority to enter a final order); True Traditions, LC v. Wu, 552 B.R. 826, 836-39 (N.D. Cal. 2015) (holding non-debtor defendant impliedly consented to final ruling after it filed a motion for summary judgment in a fraudulent transfer action without objecting to entry of a final order).

In this case, CAG expressly consented to the entry of a final judgment by the Court in its first responsive pleading. The Plaintiffs implicitly consented by filing a complaint seeking entry of a final judgment in their favor and by filing a response to CAG's Motion for Summary Judgment without objecting to the entry of a final order by the Court, as required by the national and local rules. Fed. R. Bankr. P. 7008, 7012(b); VI Local Bankruptcy Rule 7004-2.

III. DISCUSSION

A. Standard of Review

1. Summary Judgment

Summary judgment shall be granted "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a); Fed. R. Bankr. P. 7056. Material facts are those facts that might affect the outcome of the litigation.

Once the moving party has established a prima facie case, the burden shifts to the non-moving party to present evidence beyond mere "speculation and conclusory allegations" in "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any" that the factfinder could use in reasonably finding for the non-moving party. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986) (citing Fed. R. Civ. P. 56(c)). The Court construes all evidence in the record in the light most favorable to the non-moving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (citing United States v. Diebold, Inc., 369 U.S. 654, 655 (1962)).

2. Substantive Consolidation

a. General Authority

Substantive consolidation is an equitable remedy arising under federal common law. Owens Corning, 419 F.3d at 206 (citingSampsell v. Imperial Paper & Color Corp., 313 U.S. 215 (1941)). Under the Bankruptcy Code, the power to order substantive consolidation of bankruptcy estates is derived from the court's general equitable powers. Owens Corning, 419 F.3d at 208 n.14 (acknowledging that substantive consolidation is a remedy that may be available in a bankruptcy case although finding that the facts of the case did not warrant it).

While they apply slightly different standards, virtually every Circuit has recognized that substantive consolidation of debtors is available in a bankruptcy case. See, e.g., In re Bonham, 229 F.3d 750 (9th Cir. 2000); In re Giller, 962 F.2d 796, 799 (8th Cir. 1992); In re Hemingway Transp., Inc., 954 F.2d 1, 11 n.15 (1st Cir. 1992); Eastgroup Props. v. Southern Motel Ass'n, Ltd., 935 F.2d 245 (11th Cir. 1991); S.I. Acquisition, Inc. v. Eastway Delivery Serv., Inc. (In re S.I. Acquisition, Inc.), 817 F.2d 1142, 1144 n.2 (5th Cir. 1987). See also In re Augie/Restivo Baking Co., Ltd., 860 F.2d 515, 518 (2d Cir. 1988) (finding facts of that case did not justify consolidation but acknowledging it was an available remedy in bankruptcy cases); In re Auto-Train Corp., Inc., 810 F.2d 270, 276 (D.C. Cir. 1987) (same); In re Gulfco Invest. Corp., 593 F.2d 921 (10th Cir. 1979) (same).

b. Non-Debtor Consolidation

The Third Circuit left open the possibility that bankruptcycourts could consolidate non-debtors with debtors. Owens Corning, 419 F.3d at 208 n.13. Many other courts have held that a court can grant substantive consolidation of debtors and non-debtors. See, e.g., Bonham, 229 F.3d at 769-71; ...