Moody v. Security Pacific Business Credit, Inc.
| Decision Date | 29 May 1991 |
| Docket Number | Civ. A. No. 83-2383. |
| Citation | 127 BR 958 |
| Parties | James MOODY, Trustee of the Estate of Jeannette Corporation, et al., Plaintiffs, v. SECURITY PACIFIC BUSINESS CREDIT, INC., et al., Defendants, v. Frank W. STOREY and Calvin McCracken, individuals, Third-Party Defendants. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
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Robert J. Cindrich, David B. Mulvihill, Manning J. O'Connor II, Mansmann Cindrich & Titus, Douglas A. Campbell, Stanley E. Levine, Campbell & Levine, Pittsburgh, Pa., for plaintiffs.
James D. Morton, George L. Cass, Buchanan Ingersoll, P.C., Pittsburgh, Pa., William F. Lloyd, Michael J. Sweeney, Sidley & Austin, Chicago, Ill., for defendant, Security Pacific Business.
David J. Armstrong, George E. McGrann, Dickie, McCamey & Chilcote, Pittsburgh, Pa., Philip M. Halpern, Collier, Cohen, Shields & Bock, New York City, for defendants, Coca Cola of New York and KNY Development.
W. Woodruff Turner, Robert B. Sommer, Terry Budd, Kirkpatrick & Lockhart, Pittsburgh, Pa., for defendants, John P. Brogan, John J. Brogan, Hanley Dawson, Jr., Hanley Dawson III, James McLean, James R. Winoker, J. Corp., Inc. and Muench-Kreuzer Candle Co.
Robert L. Potter, Frank R. Arcuri, Strassburger, McKenna, Gutnick & Potter, Pittsburgh, Pa., for third-party defendant, Frank W. Storey.
Grace S. Harris, Pittsburgh, Pa., for third-party defendant, Calvin D. McCracken.
More than eighty years after the founding of its predecessor company, the Jeannette Corporation (sometimes hereafter "Jeannette") suffered an economic decline and bankruptcy in late 1982 from which it never recovered. Plaintiff, James Moody, Trustee of the bankruptcy estate, instituted this action to recover in excess of $12 million from the participants of a leveraged buyout of Jeannette that took place on July 31, 1981.
Plaintiff contends in this suit that the July 31, 1981, transaction was a fraudulent conveyance under the Pennsylvania Uniform Fraudulent Conveyance Act ("Pennsylvania Act") and the fraudulent conveyance provisions of the United States Bankruptcy Code. He also claims, inter alia, that certain of the defendants engaged in an unlawful dividend and/or distribution of Jeannette's assets, in violation of 15 Pa. Stat. §§ 1701, 1702.
On August 16, 1990, we concluded a five-week bench trial on Counts Two, Three, Five and Eight, the counts of the ten-count amended complaint raising these issues.1 In our findings of fact, conclusions of law and discussion below, we will set forth in detail our reasons for concluding that plaintiff has failed to establish that the July 31, 1981, transaction involved fraudulent conveyances or that any defendant authorized an unlawful dividend or distribution of Jeannette's assets. First, we summarize briefly the facts of the case and our conclusions of law.
Jeannette Corporation had its origin as Jeannette Glass Company, which was founded in 1898. Although glassmaking always remained one of Jeannette's principal businesses, it also manufactured and sold candles, ceramics, china and plastic housewares through several divisions and subsidiaries.
Maurice L. Stonehill controlled Jeannette from 1960 until it was purchased in 1978 by defendants Coca-Cola Bottling Company of New York, Inc. (sometimes hereafter "Coke of New York" or "Coke") and KNY Development Corporation (sometimes hereafter "KNY Development" or "KNY").
Coke and its subsidiary KNY purchased all of the stock of Jeannette in 1978 for nearly $40 million. After operating the company for two years with disappointing results, Coke put it on the market. Coke reached an agreement in principle to sell the company to one buyer for $19 million, but that sale was never consummated. Subsequently, on July 31, 1981, Coke and KNY sold Jeannette Corporation for $12.1 million to J. Corp., a holding company controlled by an investor group headed by defendant John P. Brogan. The Brogan group borrowed $11.7 million of the purchase price from defendant Security Pacific Business Credit, Inc. (sometimes hereafter "Security Pacific") through a transaction structured so that the loan ultimately was secured by a lien on all of Jeannette's assets. After some fifteen months under the Brogan group, a creditor of Jeannette filed an involuntary petition in bankruptcy against it under Chapter 7 of the Bankruptcy Code.2
We conclude, first, that the conveyances involved in the July 31, 1981, leveraged buyout of Jeannette Corporation were not intentionally fraudulent.
In arguing that the July 31, 1981, transaction involved intentionally fraudulent conveyances, plaintiff relies on the structure of the loan transaction between the Brogan group and Security Pacific and on the subsequent conduct of some of the defendants. Plaintiff argues that the defendants should be held liable under 39 Pa.Stat. § 357 and 11 U.S.C. § 548, because the evidence demonstrates that their actual intent was to hinder, delay, or defraud Jeannette's creditors. Plaintiff also argues that defendants should be liable under 39 Pa.Stat. § 356 because Jeannette intended or believed that it would incur obligations beyond its ability to pay. We explain below why we do not agree, and we set forth our reasons for finding that the transaction did not involve intentionally fraudulent conveyances.
Plaintiff also attacks the July 31, 1981, transaction under the constructive fraud sections of the applicable fraudulent conveyance acts, 39 Pa.Stat. §§ 354 and 355, and 11 U.S.C. § 548. While we find that the transaction was without fair consideration to Jeannette, we conclude that Jeannette was not rendered insolvent by it. Similarly, we conclude that Jeannette was not engaged in a business for which the capital remaining in its hands after the July 31, 1981, transaction was an unreasonably small capital. Because the fraudulent conveyance provisions of the Bankruptcy Code substantially mirror those of the Uniform Fraudulent Conveyance Act, we also conclude that plaintiff has failed to establish that the transaction should be set aside under those provisions.
Finally, we conclude that plaintiff has failed to prove that an unlawful dividend and/or distribution of Jeannette's assets took place as a result of the July 31, 1981, transaction.
1. Plaintiff James Moody is the duly appointed trustee of the bankruptcy estate of Jeannette Corporation. (Jt. Stip., ¶ 1).
2. Defendant Security Pacific Business Credit Inc. is a corporation organized and existing under the laws of the State of Delaware, engaged in the business of commercial finance, having a principal place of business at 228 East 45th Street in the City of New York, State of New York. A.J. Armstrong Co., Inc., which was engaged in the same business, was acquired by Security Pacific during the last week of July 1981. (For the sake of convenience, A.J. Armstrong Co., Inc. will be referred to hereinafter as "Security Pacific" unless otherwise noted). (Jt. Stip., ¶ 2).
3. Defendant The Coca-Cola Bottling Company of New York, Inc. is a corporation organized and existing under the laws of the State of Delaware, having a principal place of business in the Town of Greenwich, State of Connecticut. (Jt. Stip., ¶ 3).
4. Defendant KNY Development Corporation, which was also a Delaware corporation, was merged into Coke of New York and no longer exists as a corporate entity; it was a wholly-owned subsidiary of Coke of New York. (For convenience, Coke of New York and KNY Development will be referred to at times collectively as "Coke" or "Coke of New York"). (Jt. Stip., ¶ 4).
5. Defendant J. Corp. is a corporation incorporated under the laws of the State of Delaware on July 24, 1981. Defendant John P. Brogan ("Mr. Brogan" or "Brogan") has been the Chairman and a director of J. Corp., as well as of Jeannette Corporation, since July 1981. (Jt. Stip., ¶ 5).
6. Defendants Brogan, John J. Brogan, Brogan's father ("J.J. Brogan"), Hanley Dawson, Jr., Hanley Dawson III and James A. McLean became directors of Jeannette Corporation on or after July 31, 1981. Defendant James Winoker was a director of J. Corp. (D-259).4
7. Defendant Muench-Kreuzer Candle Company ("M-K Candle") is a corporation organized and existing under the laws of the State of Delaware. Brogan is also Chairman of the Board of M-K Candle. (Jt. Stip., ¶ 6).
8. Jeannette Corporation is a Pennsylvania corporation headquartered in Jeannette, Pennsylvania which manufactured and sold, by itself or through subsidiaries, glass, ceramic, china, plastic and candle houseware products, principally in the United States and Canada. Jeannette's predecessor, the Jeannette Glass Company, was founded in 1898. (Jt. Stip., ¶ 7).
9. As of July 1981, there were four major components of Jeannette Corporation, which conducted different manufacturing operations at different locations. The Jeannette Glass division of Jeannette Corporation, located in Jeannette, Pennsylvania, manufactured glass products. The Brookpark division of Jeannette Corporation, located in Lake City, Pennsylvania, manufactured melamine dinnerware. The Royal China subsidiary of Jeannette Corporation, located in Ohio, manufactured earthenware, chinaware and ceramic products. The Old Harbor Candle subsidiary of Jeannette Corporation, located in Massachusetts, manufactured candles. (Joint Stip., ¶ 8).
10. Jeannette's customers included chain, department, specialty and discount stores, market outlets, premium users, restaurant suppliers, and original equipment manufacturers such as lamp and appliance manufacturers. (Jt. Stip., ¶ 9).
11. In approximately 1960, Maurice L. Stonehill acquired a controlling interest in the Jeannette Glass Company, which subsequently became "Jeannette Corporation" in 1971. (Jt. Stip., ¶ 11).
12. During the years Mr. Stonehill...
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