Matter of Kearney Chemicals, Inc.

• Decision Date: 30 March 1979
• Docket Number: Bk. No. 77-222.
• Citation: 468 F. Supp. 1107
• Parties: In the Matter of KEARNEY CHEMICALS, INC., Debtor. MANUFACTURERS HANOVER TRUST COMPANY, Plaintiff-Appellant, v. KEARNEY CHEMICALS, INC., Defendant-Appellee.
• Court: U.S. District Court — District of Delaware

468 F. Supp. 1107

In the Matter of KEARNEY CHEMICALS, INC., Debtor.

MANUFACTURERS HANOVER TRUST COMPANY, Plaintiff-Appellant, v. KEARNEY CHEMICALS, INC., Defendant-Appellee.

Bk. No. 77-222.

United States District Court, D. Delaware.

March 30, 1979.

H. Murray Sawyer, Wilmington, Del., and Sheldon Lowe and Andrew DeNatale of Krause, Hirsch & Gross, New York City, for plaintiff-appellant.

Richard G. Elliott, Jr., and Michael A. Meehan of Richards, Layton & Finger, Wilmington, Del., and William M. Kahn and Leo Fox of Whitman & Ransom, New York City, for defendant-appellee.

OPINION

LATCHUM, Chief Judge.

This is an appeal from an order of the Bankruptcy Judge in a Chapter XI arrangement proceeding dismissing a complaint seeking a determination that a particular debt is nondischargeable.¹ The plaintiff-appellant is Manufacturers Hanover Trust Company (the "plaintiff"). The complaint alleges that the defendant-debtor, Kearney Chemicals, Inc. ("Kearney Chemicals"), is indebted to the plaintiff for willful and malicious injury to its property, and that under § 17(a)(8) of the Bankruptcy Act, 11 U.S.C. § 35(a)(8),² that debt is nondischargeable. Specifically, the plaintiff avers that the defendant "conspired to . . . intentionally interfere with and induce a breach" of a contract between Richard J. Kearney and the plaintiff and that it sustained damages in the amount of almost two million dollars as a result.³ The Bankruptcy Judge dismissed the complaint pursuant to Rule 12(b)(6), F.R.Civ.P.,⁴ for failure to state a claim upon which relief could be granted. The Judge based the dismissal on her conclusion that the defendant-debtor's actions were privileged, because they were "obviously . . . motivated by a desire to protect its pecuniary interests through an arrangement proceeding." (Bk. Docket Item 154).

It is well established that a complaint should not be dismissed for failure to state a claim unless it appears to a certainty that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); Scott v. Plante, 532 F.2d 939, 945 (C.A. 3, 1976); 2A Moore's Federal Practice ¶ 12.08 (2d ed. 1975). The same standard governs this Court's review on appeal of the order of dismissal.

BACKGROUND

On a Rule 12(b) motion to dismiss, the facts alleged in the complaint should be construed favorably to the pleader. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974). The following facts are alleged in the amended complaint filed in the bankruptcy court. (Bk. Docket Item 126).

The defendant Kearney Chemicals is a Delaware corporation. It filed a petition for an arrangement under Chapter XI of the Bankruptcy Act on September 13, 1977. As of June 1977, Richard J. Kearney and his wife, Caroline A. Kearney, owned 88.24 percent and 5.88 percent, respectively, of the common stock of Kearney Chemicals. (Id. par. 7). In July 1977, Richard Kearney also owned 100 percent of the common stock of another corporation, Kearney Chemicals of Louisiana, Inc. ("Kearney Louisiana").

Richard Kearney was the President and a director of both Kearney Chemicals and Kearney Louisiana, and, according to the amended complaint, he "dominated and controlled the affairs" of both corporations at all times relevant to this action. (Id. pars. 8, 9, 11 and 12).

The plaintiff is a banking corporation organized and existing under the laws of New York. On September 15, 1976, the plaintiff entered into a Credit Agreement and Pledge with Kearney Louisiana by which it "agreed to make loans to Kearney Louisiana, from time to time, in an aggregate principal amount not to exceed $4,300,000." (Id. par. 13). The plaintiff actually advanced over $2,100,000.00 to Kearney Louisiana under the agreement. (Id. par. 14). Both Richard Kearney and Kearney Chemicals guaranteed payment of the loan.

To secure his guarantee, Richard Kearney pledged to the plaintiff his shares in Kearney Louisiana and Kearney Chemicals. In Paragraph 9 of the Pledge and Security Agreement, Richard Kearney also made the following commitment:

Without the prior written consent of the Pledgee the plaintiff, the Pledgor Richard J. Kearney agrees that he will not vote for a sic consent to any merger or consolidation of the Company Kearney Louisiana or KCI Kearney Chemicals and that he will prevent the Company and KCI from issuing any stock or other securities of any nature in addition to or in substitution for the Pledged Stock, except that the Company Kearney Louisiana may issue additional equity securities for sale to any Person, provided that (i) the proceeds of such sale shall be used to prepay the Pledgee the plaintiff . . and (ii) such sale shall be on terms and conditions satisfactory to the Pledgee as evidenced by the Pledgee's prior written consent, which consent shall not be unreasonably withheld.

(Id. par. 17) (Emphasis supplied). Kearney Chemicals had full knowledge of Richard Kearney's contractual commitment to the plaintiff. (Id. par. 18).

The complaint alleges that the defendant Kearney Chemicals "conspired to unlawfully, knowingly, wrongfully, maliciously and intentionally interfere with and induce a breach of the contractual obligation quoted above of Richard J. Kearney to the plaintiff." (Id. par. 19). Two breaches are alleged. First, in June 1977 the Board of Directors of Kearney Chemicals authorized and issued an additional 8,000 shares of common stock to Caroline A. Kearney in consideration of $5,000, thereby diluting the percentage of ownership represented by the pledged shares from 88.24 percent to 15.46 percent. The second breach occurred on July 22, 1977, when the Board of Directors of Kearney Chemicals "knowingly adopted a false and fraudulent resolution by which it acquired all of the issued and outstanding stock of Kearney Louisiana from Richard J. Kearney, its alleged nominee." (Id. par. 20(d)). On that same day, Richard Kearney executed a stock power transferring the Kearney Louisiana shares to Kearney Chemicals. (Id. par. 20(e)).

Finally, the plaintiff avers that as a result of the acts complained of it sustained willful and malicious injury to its property in the amount of $1,913,204.65. (Id. par. 23).

This Court now must determine whether the allegations in the complaint are sufficient to state a claim for nondischargeability under § 17(a)(8) of the Bankruptcy Act, 11 U.S.C. § 35(a)(8).

Requirements for Nondischargeability

Since 1903 provable debts⁵ of a bankrupt that are liabilities for "willful and malicious injuries to the person or property of another" have been nondischargeable, regardless of whether the underlying claim had been prosecuted to judgment. See 1A Collier on Bankruptcy ¶ 17.01 (14th ed. 1978). This exception to the operation of a discharge currently appears in § 17(a)(8) of the Act. A person acts willfully within the meaning of § 17(a)(8) when he intentionally does something that necessarily will lead to injury. Id. ¶ 17.17, at 1650.4. An injury is malicious "if it was wrongful and without just cause or excuse, even in the absence of personal hatred, spite or ill will." Id. (Footnote omitted). In In re Minsky, 46 F.Supp. 104 (S.D.N.Y.1942), the court held that a default judgment obtained in an action against the debtor for malicious and willful inducement of a breach of contract was nondischargeable under the precursor of § 17(a)(8). Thus, if the complaint in this action alleges facts sufficient to support a claim for relief against the defendant for intentionally and without just cause interfering with or inducing a breach of the contract between Richard Kearney and the plaintiff, the order dismissing the complaint must be reversed.

Since at least 1945, the courts have looked to state law to determine the validity of a creditor's claim in a bankruptcy proceeding. See Halpert v. Industrial Commissioner of New York, 147 F.2d 375 (C.A.2, 1945). In this case the applicable state law has yet to be determined. The parties agree that the only possibilities are New York, Florida and Delaware. The Bankruptcy Judge granted the motion to dismiss on the ground that the result would be the same regardless of which State's law she applied.⁶ It is true that the courts in all three states have followed the Restatement of Torts, but as the discussion below illustrates, there are a few variations among them that may be material to the outcome of this case. To uphold the order of dismissal, therefore, this Court must conclude that the complaint is insufficient under the laws of all three States — New York, Florida and Delaware.

Inducement of a Breach of Contract

The complaint alleges that the defendant induced Richard Kearney to breach his obligation to the plaintiff bank to prevent the defendant and Kearney Louisiana from issuing any stock in addition to or in substitution for the pledged stock. Section 766 of the Restatement of Torts (1939) states the general principle applicable to interference with a contractual relationship:

One who, without a privilege to do so, induces . . . a third person not to

(a) perform a contract with another . . . is liable to the other for the harm caused thereby.

The recently promulgated Restatement (Second) of Torts § 766 (1979)⁷ embodies the same principle, but speaks in terms of the propriety of intentional interferences with the performance of a contract rather than privilege.⁸

Kearney Chemicals, the defendant, first challenges the sufficiency of the complaint by arguing that it could not have induced Richard Kearney to breach his contract, because the complaint itself alleges that Richard Kearney dominated and controlled Kearney Chemicals. Although this apparent inconsistency may hamper the plaintiff in proving its case, it does not completely foreclose the plaintiff from proving a set of facts that would entitle it to relief. The comments to § 766 under both the Restatement and the...