Swanson v. Applied Process Tech. Int'l, LLC (In re Delta–T Corp.)

• Decision Date: 09 July 2012
• Docket Number: Bankruptcy No. 10–50980–SCS.,Adversary No. 10–05043–SCS.
• Citation: Swanson v. Applied Process Tech. Int'l, LLC (In re Delta–T Corp.), 475 B.R. 495 (Bankr. E.D. Va. 2012)
• Court: U.S. Bankruptcy Court — Eastern District of Virginia
• Parties: In re DELTA–T CORPORATION, Debtor. Clara P. Swanson, Chapter 7 Trustee, Plaintiff, v. Applied Process Technology International, LLC, Bateman Litwin, N.V., Bateman Engineering, Inc., DCR Construction, Inc., M & I Marshall & Ilsley Bank, Pace Analytical Services, Inc., Defendants.

475 B.R. 495

In re DELTA–T CORPORATION, Debtor.Clara P. Swanson, Chapter 7 Trustee, Plaintiff,

v.Applied Process Technology International, LLC, Bateman Litwin, N.V., Bateman Engineering, Inc., DCR Construction, Inc., M & I Marshall & Ilsley Bank, Pace Analytical Services, Inc., Defendants.

Bankruptcy No. 10–50980–SCS.

Adversary No. 10–05043–SCS.

United States Bankruptcy Court,

E.D. Virginia,

Newport News Division.

July 9, 2012.

John D. McIntyre, Kristen D. O'Connor, Wilson & McIntyre, PLLC, Norfolk, VA, for Plaintiff.

Ross C. Reeves, Stephanie N. Gilbert, Willcox & Savage, P.C., Norfolk, VA, Justin F. Paget, Hunton & Williams LLP, Richmond, VA, for Defendants.

MEMORANDUM OPINION

STEPHEN C. ST. JOHN, Bankruptcy Judge.

This matter comes before the Court upon the Complaint filed by Clara P. Swanson, Chapter 7 Trustee (“Trustee”), against the defendants DCR Construction, Inc. (“DCR”) and M & I Marshall & Ilsley Bank (“M & I”). Following the conduction of oral argument on February 13, 2012, the Court took this matter under advisement. The Trustee, DCR, and M & I have stipulated to the facts necessary for this Court to decide the merits of the Complaint, and the matter is therefore ripe for decision. The Court has jurisdiction over this proceedingpursuant to 28 U.S.C. §§ 157(b)(2)¹ and 1334(b). Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409(a). This Memorandum Opinion constitutes the Court's findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52, as incorporated into the Federal Rules of Bankruptcy Procedure by Rule 7052.

I. History

A. The Background of the Bankruptcy Case

The debtor, Delta–T Corporation (“Delta–T”), was founded in 1984. At one time, Delta–T was viewed as one of the leading bioethanol technology providers in the nation, offering design and manufacturing services and products. Complaint ¶ 10. Delta–T began experiencing financial difficulties, and on May 25, 2010 (the “Petition Date”), Delta–T filed a petition for relief under Chapter 7 of Title 11 of the United States Code in this Court. Stipulation ¶ 1. The Trustee was duly appointed as the Chapter 7 Trustee for Delta–T. Id. ¶ 2. On November 18, 2010, the Trustee commenced the above-captioned adversary proceeding by filing a fourteen-count Complaint against: (i) Applied Process Technology International, LLC (“APTI”); (ii) Bateman Litwin, N.V. (“Bateman Litwin”); (iii) Bateman Engineering, Inc. (“Bateman Engineering”); (iv) DCR; (v) M & I; and (vi) Pace Analytical Services, Inc. (“Pace”). ²

B. The Settlement Agreement

In August 2011, the Trustee entered into a settlement agreement with APTI, Bateman Litwin, and Bateman Engineering, which, following a hearing, was approved by this Court by order entered on November 3, 2011 (“Settlement Agreement”). Pursuant to the Settlement Agreement, among other things, Bateman Litwin and APTI assigned to the Trustee the totality of their interests in certain garnished funds described in the Complaint, held pursuant to a writ of garnishment issued by the United States District Court for the Middle District of Florida, in the approximate amount of $648,000.00 (“Garnished Funds”). ³ Accordingly, the only remaining contest between the Trustee on the one hand and DCR and M & I on the other hand is that contained in Count Twelve of the Complaint, which seeks entry of a declaratory judgment regarding the extent, validity, and priority of the liens allegedly held by DCR and M & I with respect to the Garnished Funds.⁴

II. The Complaint Against DCR and M & I

With respect to defendants DCR and M & I,⁵ the Trustee alleges as follows:

41. ... DCR obtained a judgment in the amount of $6,178,928.24 plus interest dated December 31, 2009 against Delta–T, in the United States District Court for the Middle District of Tampa [ sic] (hereafter the “[Florida] District Court”).

42. The [Florida] District Court entered an order directing the clerk to enter an amended judgment dated January 5, 2010 adding the co-plaintiff, M & I Marshall Ilsley Bank as a judgment creditor. The Clerk entered an amended judgment showing both co-plaintiffs on that same day.

43. On January 15, 2010, the Florida District Court entered an Order Authorizing Writs of Garnishment against Bank of America and Branch Bank[ing] and Trust Company (“BB & T”) to enforce the DCR judgment.

44. According to the pleadings on file in the Florida District Court proceedings, BB & T is holding approximately $648,662.58 (the “Garnished Funds”) pursuant to the writ.

45. The Garnished Funds were generated by the sale of certain items of personal property that Delta–T owned. Between December 12, 2009 and January 15, 2010, Delta–T sold its excess steel to two scrap dealers. These sales were made pursuant to purchase orders and evidenced by invoices, signed and issued prior to payment being made to Delta–T. For each sale, Delta–T and the respective buyer entered into a binding contract for the purchase of the goods, and title to those goods transferred, prior to the buyer making payment.

46. The Garnished Funds consist entirely of the proceeds of “accounts” as that term is defined in the Uniform Commercial Code, including the proceeds of accounts arising from the sale of the Debtor's excess steel.

....

163. There is currently a dispute between the Trustee and [DCR and M & I] regarding the extent, validity and priority of property of their liens against, or rights in and to the estate, including the Garnished Funds.

164. Based upon the records reviewed by the Trustee to date, the following parties assert liens against property of the estate:

a. APTI by virtue of its alleged liens dating back to the June 1 Note, which was perfected on August 5, 2009; ⁶

b. DCR by virtue of its garnishment order and its writs of execution, which were perfected no earlier than January 15, 2010;

c. M & I Bank, as a co-plaintiff with regard to the DCR liens, which was perfected no earlier than January 15, 2010; and

d. Pace, which filed a financing statement against all of the Debtor[']s accounts receivable on March 8, 2010.⁷

165. As noted above, the lien securing the June 1 Note is (i) the first lien filed against Delta–T's tangible and intangible personal property (exclusive of inventory); and (ii) avoidable for the benefit of the bankruptcy estate pursuant to 11 U.S.C. § 551. Although the Debtor and Bateman Litwin entered into the Amended Note on or about December 1, 2009, that instrument specifically stated that it did not satisfy or otherwise discharge the underlying instruments it sought to consolidate. Accordingly, the lien securing the June 1 Note was likewise not discharged or released.

166. Because the lien securing the June 1 Note is avoidable as a preference, given that it was not perfected until roughly 60 days after the Note was executed, it is avoidable for the benefit of the Debtor's bankruptcy estate pursuant to 11 U.S.C. § 551.

167. The amount of the June 1 Note is $7,272,186, a sum which vastly exceeds the value of all existing property of the estate, including the Garnished Funds.

168. The Trustee's rights, in and to all property of the estate are thus superior to all other alleged lien creditors or other claimants.

169. Even if the liens securing the June 1 Note and the other Notes are deemed to have been discharged by virtue of the Amended Note, however, that instrument too is void or avoidable by the Trustee for the benefit of the Debtor's bankruptcy estate. Accordingly, the Trustee's rights in and to all property of the estate are still superior to all other alleged lien creditors or other claimants.

Complaint ¶¶ 41–46, 163–69. In its answer (“DCR Answer”), DCR asserts the Garnished Funds “are the proceeds of the cash sales of inventory, which had been located in DCR's yard located in Florida, to two different buyers and for which payment was made substantially contemporaneously with receipt of the inventory by the buyers.” DCR Answer ¶ 45. DCR further asserts that the Garnished Funds consist primarily of the proceeds of inventory, with the source of the remaining funds being unknown. Id. ¶ 46. DCR also pleaded in the affirmative that any security interest granted to Bateman Litwin would have been avoidable by DCR under Florida state law pursuant to Fla. Stat. § 726.106(2), and, thus, even if the Trustee avoids and retains the alleged Bateman Litwin security interest, that security interest remains avoidable by DCR. Id. ¶ 186.⁸

APTI answered and cross-claimed against DCR, claiming a superior entitlementto the Garnished Funds on three bases:

19. The Garnished Funds are the proceeds from Delta–T's exercise of its right of replevin of DCR as to the raw materials pursuant to the Final Judgment rendered in the Replevin suit.

20. Alternatively, the Garnished Funds are the proceeds of accounts (or payment intangibles) generated by the purchase orders Delta–T received from the scrap dealers immediately prior to delivery of the raw materials to the scrap handlers.

21. Alternatively, if the raw materials were the inventory of Delta–T, APTI had a perfected security interest therein without the requirement of a financing statement being filed. The lien on the inventory attached and was liquidated prior to the expiration of the filing deadline under applicable state law.

APTI Cross–Claim ¶¶ 19–21. APTI has now exited this adversary proceeding by reason of the Settlement Agreement with the Trustee. Counsel for the Trustee advised at oral argument that the Trustee now relies only on the argument that the purchase orders for the sale of the excess steel created accounts in which the Trustee has a security interest as a result of the Settlement Agreement, and that the Trustee's security interest attached to the proceeds of those accounts, thereby giving the Trustee rights superior to any rights DCR and M & I may have in the Garnished Funds. Counsel for the Trustee confirmed that the Trustee has abandoned any and all additional arguments that were...