SPM Mfg. Corp., In re

Decision Date15 September 1992
Docket NumberNo. 92-1379,92-1379
Citation984 F.2d 1305
Parties, 28 Collier Bankr.Cas.2d 451, 23 Bankr.Ct.Dec. 1529, Bankr. L. Rep. P 75,090 In re SPM MANUFACTURING CORPORATION, Debtor. OFFICIAL, UNSECURED CREDITORS' COMMITTEE, Appellant, v. Peter M. STERN, Chapter 7 Trustee of SPM Manufacturing Corporation, and Robert and Frances Shaine, Appellees. . Heard
CourtU.S. Court of Appeals — First Circuit

William C. Penkethman with whom David J. Noonan and Kamberg, Berman, P.C., Springfield, MA, were on brief, for appellant.

Peter M. Stern with whom Cynthia J. Gagne and Law Office of Peter M. Stern, Springfield, MA, were on brief, for appellee Peter M. Stern, Chapter 7 Trustee of SPM Mfg. Corp.

J. Daniel Marr with whom Hamblett & Kerrigan P.A., Nashua, NH, was on brief, for appellees Robert and Frances Shaine.

Before TORRUELLA, Circuit Judge, CAMPBELL, Senior Circuit Judge, and BRODY, * District Judge.

LEVIN H. CAMPBELL, Senior Circuit Judge.

The district court affirmed a bankruptcy court order which compelled a secured creditor to pay to the debtor's estate a portion of the proceeds it had received in satisfaction of its allowed secured claim. The bankruptcy court's order contravened an agreement between the secured creditor and the general, unsecured creditors to share in the proceeds from the former's secured interest. The bankruptcy court believed, and the district court agreed, that such an agreement violated Bankruptcy Code policy. Appellant, the Official Unsecured Creditors' Committee which entered the agreement on behalf of the general, unsecured creditors, argues that the bankruptcy court's order to pay over the disputed funds to the estate was an error of law. We agree with appellant, and so reverse the district court judgment, vacate the order in part and remand to the bankruptcy court.

I. BACKGROUND

Debtor SPM Manufacturing Corporation ("SPM" or "Debtor"), a family-owned manufacturer of photo albums and related products based in Springfield, Massachusetts, filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code ("Code") on April 3, 1989, in the United States Bankruptcy Court for the District of Massachusetts. See 11 U.S.C. § 1101 et seq. SPM management continued to operate the company as a debtor in possession ("DIP") pursuant to 11 U.S.C. §§ 1101(1) and 1107. Appellee Robert Shaine continued to serve as president of SPM and was an unsecured "insider" creditor. Appellee Frances Shaine continued on as chair of the board of SPM, in addition to being a stockholder and having responsibility for the general administrative functions of SPM.

Appellant Official Unsecured Creditors' Committee ("Committee") was appointed by the bankruptcy court pursuant to 11 U.S.C. § 1102(a) on April 13, 1989. When SPM filed for bankruptcy protection, the company owed approximately $5.5 million to the general, unsecured creditors represented by the Committee, including International Paper Company and other suppliers. 1 Approximately $9 million was owed to Citizens Savings Bank ("Citizens" or "Bank"), which held a perfected, first security interest in all of SPM's assets except certain real estate. Unsecured debts that had priority under section 507(a) of the Code, 11 U.S.C. § 507(a), consisted primarily of a tax claim of approximately $750,000 held by the Internal Revenue Service ("I.R.S.") for unpaid withholding taxes. The Shaines are personally liable for whatever portion of that tax claim is not paid out of the estate. 2

Chapter 11 proceedings to reorganize SPM were contentious and unproductive. Though the DIP filed a plan for reorganization in September 1989, later amended in November 1989, the plan was never confirmed. The Committee decided at about the same time that reorganization under current management was unfeasible, but that a liquidation of SPM's assets would leave nothing for any creditor besides Citizens, whose secured claim exceeded the value of its collateral (substantially all of SPM's assets). Consequently, the Committee began discussions with Citizens about cooperating in the bankruptcy proceedings to maximize the value of SPM's assets and provide some return to the general, unsecured creditors.

On October 12, 1989, the Committee and Citizens executed the agreement ("Agreement") which is the subject of this appeal. The Agreement recites the opinion of Citizens and the Committee that, "through their mutual cooperation ... in order to maximize recovery on their respective debts it is in their mutual interest to enter into this Agreement." The contract explicitly states that the Committee negotiated and executed the Agreement on behalf of the general, unsecured creditors, "[e]xclusive of the Internal Revenue Service and potential 'insider' creditors."

Citizens and the Committee agreed to cooperate in the following manner: (1) to "take all actions reasonably necessary, including, without limitation, initiation of motions and filing of other pleadings in the Proceeding, to replace Debtor's current CEO with [a] New Manager"; (2) "to work together to formulate a joint plan of reorganization"; and (3) to "negotiate with one another in good faith to reach mutually acceptable agreements" with respect to a number of details of the joint plan for reorganization.

Citizens and the Committee also agreed to share whatever proceeds they received as a result of the reorganization or liquidation of the Debtor. Section 2.4 of the Agreement specified the terms of the "sharing arrangement":

Any and all net proceeds of the sale, refinancing or other disposition of the assets of SPM and also North American Album Corporation or any other entity whose assets are subject to Citizens' security interest (net proceeds is defined as those proceeds remaining after payment of administrative expenses as so defined by 11 U.S.C. § 503, specifically including attorney's fees and expenses incurred by the Committee and by Citizens) received by Citizens and/or the Creditors' Committee from Debtor's operations in whatever form said proceeds make [sic] take (including proceeds from the operation of any successor entity's business) or from the sale or disposition of the Debtor's or a successor's assets and/or stock shall be divided between Citizens and the Creditors' Committee as follows:

1. The first $3,000,000 of such proceeds shall be shared 90% to Citizens and 10% to the Creditors' Committee ...;

2. The second $3,000,000 shall be shared by citizens [sic] and the Creditors' Committee with 80% going to Citizens and 20% to the Creditors' Committee;

3. The next $3,000,000 shall be shared 70% to Citizens and 30% to the Creditors' Committee;

4. The next $3,000,000 shall be shared 60% to Citizens and 40% to the Creditors' Committee; and

5. All proceeds in excess of $12,000,000 shall go to the Creditor's Committee.

The Agreement contained a standard savings clause which provided that "[i]n the event of any term or provision hereof is invalid or unenforceable [the] remainder of this Agreement shall be valid and enforceable to the extent permitted by law."

Thereafter, the Committee and the Bank filed numerous motions, both independently and jointly, seeking unsuccessfully a change in SPM's management, a grant of relief from the automatic stay for Citizens, the appointment of a Chapter 11 trustee, and conversion of the case from Chapter 11 to Chapter 7. At a motion hearing in December 1989, the Agreement was filed with the court as an exhibit. The court expressed concern about the Agreement's sharing provision, characterizing it as a "tax-avoidance" scheme. 3 However, at no time during the reorganization proceedings did any creditor, the Shaines or other interested party 4 object to the mutual promises by Citizens and the Committee to cooperate during the reorganization proceedings. The court never formally approved or disapproved the Agreement before January 1991.

After it became apparent that SPM could not be successfully reorganized, the bankruptcy court granted a motion by Citizens on April 16, 1990, to appoint a receiver with the power to negotiate a sale of all of SPM's assets pursuant to 11 U.S.C. § 363(b). On December 19, 1990, SPM's assets were sold to Heritage Albums, Inc. for a purchase price of $5,000,000.00. On December 21, 1990, a previously entered order went into effect granting Citizens relief from the automatic stay, see 11 U.S.C. § 362, and converting the case into a Chapter 7 liquidation proceeding, see 11 U.S.C. § 1112(b). After conversion to Chapter 7, appellee Trustee Stern was appointed. See 11 U.S.C. § 701(a).

On December 24, 1990, the Committee and Citizens filed a joint motion for "Entry of Order Requiring Delivery of Proceeds and Requiring Expedited Determination" which requested distribution of the sale proceeds to Citizens. The motion recited that the entire amount was subject to Citizens' security interest pursuant to 11 U.S.C. § 506 and announced that, after receiving the $5 million and paying various administrative fees, "Citizens will distribute a portion of the net proceeds to Kamberg, Berman, P.C. [Committee's counsel] in accordance with its October 12, 1989 agreement with the Committee." At a hearing before the bankruptcy court on January 3, 1991, the Debtor and the Shaines objected to the motion, arguing that the Agreement distributed proceeds to general, unsecured creditors ahead of the priority tax creditors in violation of the statutory scheme for distribution. See 11 U.S.C. §§ 724-726. Citizens and the Committee responded that the $5 million belonged to Citizens and that the Bank had a right to share its proceeds with the Committee without paying the I.R.S. or other creditors first.

The bankruptcy court granted Citizens' and the Committee's motion to the extent it requested satisfaction of Citizens' allowed secured claim for $5 million, but rejected the motion to the...

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