Liberal Market, Inc. v. Malone & Hyde, Inc.

• Decision Date: 07 October 1981
• Docket Number: Adv. No. 3-81-0379,3-81-0401.,Bankruptcy No. 3-81-00305
• Citation: 14 BR 685
• Parties: The LIBERAL MARKET, INC. by the Official Creditors' Committee, Plaintiff, v. MALONE & HYDE, INC. et al., Defendants. In the Matter of The LIBERAL MARKET, INC., Debtor.
• Court: U.S. Bankruptcy Court — Southern District of Ohio

14 B.R. 685 (1981)

The LIBERAL MARKET, INC. by the Official Creditors' Committee, Plaintiff, v. MALONE & HYDE, INC. et al., Defendants In the Matter of The LIBERAL MARKET, INC., Debtor.

Bankruptcy No. 3-81-00305, Adv. Nos. 3-81-0379, 3-81-0401.

United States Bankruptcy Court, S.D. Ohio, W.D.

October 7, 1981.

Jay A. Rosenberg, Cincinnati, Ohio, for Official Creditors' Committee.

Bamberger & Feibleman, Indianapolis, Ind., for Liberal Market, Inc.

Peter Donahue, Dayton, Ohio, for debtor.

R.P. Cunningham, Columbus, Ohio, for plaintiff/defendant.

H. Andrew Sonneborn, Indianapolis, Ind., John Cloud, Dayton, Ohio, for Schear Group.

MEMORANDUM DECISION ON MOTIONS TO DISMISS

CHARLES A. ANDERSON, Bankruptcy Judge.

FACTS

The Liberal Market, Inc. filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code on 4 February 1981.

Upon "motion" filed on 2 March 1981 by Malone & Hyde, Inc., raising the question of adequate protection, and upon consent of the Debtor-in-Possession, the operation of the business was ordered terminated by order entered 3 March 1981. Since closing the business the case administration has involved the sale and disposition of assets, primarily supermarket locations in several areas of different counties in Ohio and numerous adversarial proceedings pertaining thereto.

On 3 March 1981 an application was filed by several labor unions and allied interests as creditors, seeking the appointment of an "operating Trustee" and "for such other and further relief as this Court may seem just and proper." In pertinent part, it was alleged that the Debtor-in-Possession was continuing payments on unoccupied leased premises, "apparently owned by one of the principal shareholders of the Debtor, and . . . has been selling inventory for as little as one-half its actual value without permission of the Court."

Notice of the hearing upon the application was duly served upon all creditors and numerous other interested parties, including the attorneys of record for Malone & Hyde, Inc., The Liberal Market, Inc., its parent corporation, and allied corporate entities.

After hearings on this application, (later joined by the request of the Creditors' Committee) on 9 March 1981 and on 16 March 1981, the court entered a decision and order on 20 March 1981 declining to appoint a trustee, but further finding and concluding as follows:

"The court has a tool available under the terms of 11 U.S.C. § 1106(b), without regard to the equity jurisdiction of a bankruptcy court, to deal with the interests of the various parties now involved. We direct attention to the authority in this statute authorizing an examiner to perform `any other duties of the trustee that the court orders the debtor-in-possession not to perform\'. Hence, the court may give an examiner additional duties not specifically enumerated as circumstances such as involved instanter warrant. See House Report No. 95-595, 95th Cong. 1st Sess. (1977) 404. Obviously, operation of the business of Debtor is a function of a trustee conformably to 11 U.S.C. § 1108, which business operation does not even require a court order.

Based upon the foregoing summary analysis, it is

ORDERED, ADJUDGED AND DECREED that Ira W. Rubin should be and is hereby appointed as Examiner for and with the following purposes and duties, to-wit:

(1) Except to the extent that the court may order otherwise, investigate the acts, conduct, assets, liabilities, and financial condition of the Debtor, the operation of the Debtor\'s business and the desirability of the continuance of the business, and any other matter relevant to the case or to the formulation of a plan;

(2) As soon as practicable, file a statement of such investigation, including any fact ascertained pertaining to fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of the affairs of the debtor, or to any cause of action available to the estate;

(3) Assume the authority formerly vested in the Debtor-in-Possession to supervise and control the operation of the business, or any part thereof deemed advisable, upon approval of the Creditors\' Committee, and as soon as proper financing has been assured.

The Examiner may, at his discretion, draw from the Debtor-in-Possession current management personnel for the implementation of daily business activities.

(4) Recommend as soon as possible whether there should be a conversion of the case to a case under Chapter 7.

ORDERED, ADJUDGED AND DECREED, that all of the other statutory rights of a debtor-in-possession, including title and possession of debtor\'s assets, and the exclusive right to file a Plan of reorganization, shall remain intact and in full force and effect until further order herein.

ORDERED, that the chief executive officer, or nominee, of United Food and Commercial Workers Union, Local 1552, and also, of Amalgamated Food and Allied Workers, District Union No. 430, are hereby added as members of the Creditors\' Committee heretofore appointed pursuant to 11 U.S.C. § 1102, unless or until a special additional committee of creditors be appointed which includes such labor union executives."

On 15 May 1981 the Creditors' Committee and Ira Rubin, the Examiner appointed by the court, filed an application "for the joint examination of witnesses and for any other and further relief as to this Court may seem just and proper. . . ." The application recites, "based upon the information acquired by applicants to date, it appears clear that serious questions exist with respect to the relationship and transactions between and among the Debtor and the entities or persons from whom the Debtor leased real property, the principals of which were the same or closely related. There are also serious questions with respect to the transactions between the Debtor and certain of its secured creditors, including, inter alia, Malone & Hyde, Inc. and Scott Lad Foods, Inc." Further, "Applicants believe, and the Debtor agrees, that the best interests of the estate would be served if applicants, rather than the Debtor, jointly pursued any claims the Debtor and Debtor-in-Possession might have against the persons or entities referred to above, as well as any other claims the Debtor or Debtor-in-Possession may have."

The court further ordered, "that pursuant to Bankruptcy Code §§ 1103(c)(5) and 1106(b), respectively, the Official Creditors' Committee and the U.S. Examiner shall be authorized to jointly commence and prosecute, in the name and on behalf of the Debtor or Debtor-in-Possession, any action that the Debtor or Debtor-in-Possession would be authorized to commence and prosecute in its own right, including, but not necessarily limited to actions to recover preferential transfers, fraudulent transfers, transfers made after the filing of the petition herein, or to otherwise recover any property of the Debtor or Debtor-in-Possession as they, in their sole discretion, elect to commence and prosecute. . . ."

Said application of 15 May 1981 was granted by order entered 26 May 1981, no notice of hearing required, both the Creditors' Committee and the Examiner having been previously duly appointed.

The instant litigation is a combination of two adversary proceedings, Numbers 81-0379 and 81-0401, which were consolidated for the purposes of discovery and trial because of common questions of both fact and law, by order entered 4 August 1981 conformably to Bankruptcy Rule 742(a) and Federal Rule of Civil Procedure 42(a).

Under Adv. No. 81-0379, Malone & Hyde, Inc. instituted a suit on 15 June 1981 against The Liberal Market, Incorporated, seeking a turnover of funds held by defendant in the amount of $592,135.00 and any other funds derived from the sale of collateral covered by the security interest of plaintiff, or alternative relief (hereinafter the "Malone & Hyde, Inc. Suit"). On 9 July 1981 the Debtor filed its answer, admitting the security interest but denying "for want of knowledge" the monetary amounts pleaded.

On 20 July 1981 upon motion of the Creditors' Committee (pursuant to the aforementioned order entered on 26 May 1981) the Answer filed by the Debtor was stricken by court order and an Answer in behalf of the Debtor-in-Possession filed by the Creditors' Committee, admitting sales of inventory but placing at issue the validity of the security interest and further alleging, inter alia, that indispensable parties, Malone & Hyde Financial Corp., Schear Group, Inc., Herbert Schear, Harry Schear, Hyman Schear and Eugene Schear, have not been joined.

Under Adv. No. 81-0401, The Liberal Market, Inc., by the Official Creditors' Committee, instituted a suit on 15 June 1981 against Malone & Hyde, Inc., Malone & Hyde Financial Corp., Schear Group, Inc., Herbert Schear, Harry Schear, Hyman Schear, and Eugene Schear seeking the invalidation of an alleged security interest or equitable subordination, for compensatory damages and punitive damages in the amount of $5,000,000.00 for various causes of action, including a violation of the "Federal Anti-Trust Laws" (hereinafter "The Liberal Market, Inc. suit").

Conformably to the previous court orders mentioned, the Examiner has now by order joined in both suits in behalf of the Debtor, The Liberal Market, Inc.

OPINION

These two adversarial proceedings, even though combined for trial and disposition, are now before the Court upon separate motions to dismiss directed to various alleged claims and parties.

One motion sub judice was filed in the Liberal Market, Inc. suit on 23 July 1981 in behalf of Defendants, Schear Group, Inc., Herbert Schear, Harry Schear, Hyman Schear and Eugene Schear (hereinafter the "Schear motion") on the ground that the amended complaint fails to comply with Rule 9(b) of the Federal Rules of Civil Procedure because it fails to state a claim upon which relief can be granted, and further seeks dismissal of certain other alleged claims under Rule 12(b)(6), supported by a brief...