Schwab Indus., Inc. v. Huntington Nat'l Bank (In re Sii Liquidation Co.), CASE NO. 10-60702
| Decision Date | 24 October 2014 |
| Docket Number | CASE NO. 10-60702,ADV. NO. 14-6024 |
| Parties | IN RE: SII LIQUIDATION COMPANY, Debtor. SCHWAB INDUSTRIES, INC., Plaintiff, v. THE HUNTINGTON NATIONAL BANK et al., Defendants. |
| Court | U.S. Bankruptcy Court — Northern District of Ohio |
MEMORANDUM OF OPINION (NOT INTENDED FOR PUBLICATION)
Now before the court is a motion to remand filed by Plaintiff following Defendant The Huntington National Bank's ("Huntington") removal of the case from the Cuyahoga County Court of Common Pleas on June 3, 2014.1 Huntington opposes Plaintiff s request for remand.
Bankruptcy court jurisdiction emanates from 28 U.S.C. § 1334. In accordance with § 1334(b), the United States District Court for the Northern District of Ohio issued a general order of reference on April 4, 2012, thereby transferring its jurisdiction to the bankruptcy court. Jurisdiction will be discussed further hereinafter. Venue is proper under 28 U.S.C. § 1409. The court takes judicial notice of the main bankruptcy case and related adversary proceedings.
This opinion is not intended for publication or citation. The availability of this opinion, in electronic or printed form, is not the result of a direct submission by the court.
Schwab Industries, Inc. ("Schwab Ind.") was formed more than forty years ago by Jerry Schwab. Schwab Ind. was an Ohio corporation headquartered in Dover, Ohio with assets located in Ohio and Florida, including an orange grove with potential limestone mining opportunities and a deep water port. With its affiliates,2 Medina Cartage Co., Medina Supply Company, Quality Block & Supply, Inc., O.I.S. Tire, Inc., Twin Cities Concrete Company, Schwab Ready-Mix, Inc., Schwab Materials, Inc., and Eastern Cement Corp., Schwab Ind. "produce[d], suppl[ied] and distribute[d] ready-mix concrete, concrete block, cement and related supplies to commercial, governmental and residential contractors throughout Northeast Ohio and Southwest Florida." ( In 2010, Schwab Ind. was owned by four family members: Jerry Schwab; his wife, Donna Schwab; and their two children, Mary Lynn Schwab and David Schwab.
By the mid-2000s, Schwab Ind. had revenues in the hundreds of millions of dollars. But as a result of the Great Recession, and its severe impact on the real estate industry, Debtors' sales declined by nearly fifty percent between fiscal years 2007 and 2009, from approximately $300,000,000 to $105,000,000. "The decrease in sales negatively impact[ed] Debtors' working capital availability and cash flows." (Id. at ¶ 19) By its own admission, Schwab Ind. experienced a cash flow problem in the winter of 2008-2009. In January 2010, Schwab Industries, Inc.'s primary secured lenders declared a default. Defendant Huntington National Bank was one of the secured lenders of Schwab Ind.
Seasonal fluctuations in revenue resulted in the need for Schwab Ind. to obtain capital infusions during its off-season. "Plaintiff traditionally obtained from the Secured Lenders a loan in the approximate amount of $2,000,000.00 called an "over advance" which provided capital to allow Plaintiff to meet its financial obligations during the inclement winter monthswhen the construction industry was dormant." (Cuyahoga Cty. Complaint ¶ 26, Adv. Case ECF No. 1-1) In 2009, Plaintiff was unable to obtain the loan necessary loan from its secured lenders. Schwab Ind. alleges that its inability to secure the loan was a contributing factor in Schwab Ind.'s decision to file bankruptcy.
On February 28, 2010, Schwab Ind., along with related entities, (now collectively known as "Debtors") filed chapter 11 bankruptcy petitions.3 Debtors were represented by Hahn Loeser & Parks, LLP ("HLP"), as main bankruptcy counsel, and Brouse McDowell LPA, as conflicts counsel. Lead bankruptcy counsel was Lawrence Oscar.
After filing bankruptcy, Debtors were unable to obtain post-petition financing to continue operations. As a result, Debtors sold substantially all of their assets in May 2010. As part of the purchase agreement, Debtors agreed "to change their corporate names (and all doing business as registrations and foreign qualifications registrations using such corporate names) within 15 days after the Closing to names that do not use any name that is the same as or confusingly similar to any name included in the Acquired Assets and shall seek new case captions in their Bankruptcy Case." )
Later that year, Debtors confirmed a plan of liquidation and Debtors' remaining assets were transferred to a Creditor Trust. Under paragraph twenty-six of the confirmation order, Debtors became known as SII Liquidation Company and their remaining trade names were transferred to OldCastle Materials, Inc., the May 2010 purchaser of the bulk of the assets. (Findings of Fact ¶¶ 26, 28; Main Case ECF No. 698). Further, the amended plan of liquidation, confirmed on December 15, 2010, provided for the wind-down and dissolution of Debtors and retirement of the interests of the equity security holders. (Am. Plan ¶¶ 5.7, 7.5, Main Case ECF No. 698-1)
In March 2014, the Creditor Trustee, John B. Pidcock, entered into a settlement agreement with David Schwab, a former equity stakeholder in Schwab Ind. that settled some of the Creditor Trust's claims against David Schwab and provided for the reissuance and sale of Schwab Ind.'s stock to him for $100,000. The plaintiff in this action purports to be the entity that purchased the reissued stock of the liquidated Debtors.
In the early 1990s, Jerry Schwab created a trust ("Schwab Trust") for the benefit of his children, David A. Schwab and Mary Lynn Schwab. Defendant Andrew Krause ("Krause"), now an attorney with Hahn, Loeser & Parks LLP ("HLP"), provided legal assistance in the formation of the trust. The trust res consisted of life insurance policies on the lives of Jerry Schwab and his wife, Donna S. Schwab. Pursuant to a split dollar agreement, the life insurance premiums were paid by Schwab Ind. In exchange for the premium payments, Schwab Ind. obtained collateral security interests in the premiums contributed to the Trust. Huntington is thetrustee ("Trustee") of the trust as successor to Huntington Trust Company of Florida NA.
An advisory board has authority to make decisions for the Schwab Trust. In 2009, this board authorized a loan of $2,000,000, and up to $3,000,000, to provide working capital to Schwab. Ind. from trust assets. Huntington, as trustee of the Schwab Trust, sought a legal opinion on the propriety of making the loan. The opinion, which advised against the loan, came from Attorney Krause, now employed by HLP. Plaintiff contends that Attorney Krause's opinion letter was a conflict of interest between his original client, Jerry Schwab, and Huntington. Plaintiff also contends that Huntington wrongly withheld approval of the loan because provisions of the Schwab Trust insulated Huntington from liability.
As previously stated, Huntington was also a secured creditor of Schwab Ind.
On December 15, 2010, the court confirmation Debtors' liquidation plan ("Plan"). Debtors' remaining assets were transferred to the Creditor Trust. (First Am. Plan ¶ 1.27, Main Case ECF No. 698) These assets specifically included Avoidance Action and Miscellaneous Causes of Action, as described in the Plan, order confirming the Plan, and related documents. John B. Pidcock was appointed Creditor Trustee.
The Creditor Trustee continues to pursue assets on behalf of the Creditor Trust. Other adversaries are pending that may result in additional monies to distribute to unsecured creditors.
The bankruptcy case fostered numerous lawsuits, both by and against the Schwabs. Relevant litigation includes the following:
A. KeyBank N.A. v. Huntington National Bank, Adv. Case. No. 10-6097
KeyBank, N.A. acted as an agent for a group of secured lenders in the bankruptcy case and filed this adversary proceeding to obtain Schwab Ind.'s interest in the Schwab Trust assets under the split dollar agreement. Through crossclaims, counterclaims and the like, the Schwabs and others were joined in the action. Following a withdrawal of the reference, the parties entered into a settlement on most of the claims. Huntington obtained summary judgment against David Schwab on his counterclaims and the matter is concluded.
B. John B. Pidcock v. Jerry A. Schwab, et al., Adv. Case No. 12-6022
In this adversary, the Creditor Trustee is suing various members of the Schwab family for alleged breaches of fiduciary duties owed to the estate and creditors, as well as to recover preferences and fraudulent transfers. As outlined above, in March 2014, the Creditor Trustee reached a settlement of some of the claims against David A. Schwab and agreed to reissueSchwab Ind. stock to him in exchange for $100,000. The balance of the case is still pending.
C. David A. Schwab v. Lawrence E. Oscar, et al., Adv. Case No. 12-6035
Schwab family members, individually as shareholders and derivatively on behalf of Schwab Ind., sued bankruptcy counsel for legal malpractice and other claims. In an opinion dated January 22, 2014, the court summarized its findings that the plaintiffs lacked standing and the claims were barred by res judicata:
First, the court found that Plaintiffs lacked standing to bring the lawsuit because they identified no specific harm to themselves, separate and apart from any injury to the corporation, that created individual shareholder standing. Additionally, the court found that Plaintiffs had failed to obtain authority to pursue derivative claims on behalf of the corporation, those claims now belonging to the Creditor Trustee/estate. Finally, the court found the claims were barred by res judicata because they should have been raised at the...
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