Wells v. THB Am., LLC (In re Clements Mfg. Liquidation Co.)

• Decision Date: 17 October 2014
• Docket Number: 10–7341.,Adversary Nos. 10–6123,Bankruptcy No. 09–65895–TJT.
• Parties: In the Matter of CLEMENTS MANUFACTURING LIQUIDATION COMPANY, LLC fka Kensa, LLC fka Clements Manufacturing of Michigan, LLC dba Clements Manufacturing, LLC, Debtor. Charles L. Wells, III, Chapter 7 Trustee, Plaintiff, v. THB America, LLC, Tianhai Electric North America, and Sakoma, LLC, Defendants. Harold Zaima, an individual, Zaima Family LLC, a Michigan limited liability company, Sakoma, LLC, a Michigan limited liability company, and Kensa de Honduras S. de R.L., a Honduran company, Plaintiffs/Counter–Defendants, v. China Auto Electronics Group Ltd., a Bermudan corporation; Henan Tianhai Electric Co., Ltd., a Chinese corporation; Hebi Tianhai Huanqju Electric Company, Ltd., a Chinese corporation, Defendants, and Tianhai Electric North America, Inc., A Michigan corporation; THB America, LLC, A Michigan limited liability company, Defendants/Counter–Plaintiffs and Third Party Plaintiffs, v. Clements Manufacturing Liquidation Co., LLC, f/k/a Kensa, LLC, a Michigan limited Liability company, and Charles L. Wells, III, Chapter 7 Trustee, Third Party Defendants.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — Eastern District of Michigan

521 B.R. 231

In the Matter of CLEMENTS MANUFACTURING LIQUIDATION COMPANY, LLC fka Kensa, LLC fka Clements Manufacturing of Michigan, LLC dba Clements Manufacturing, LLC, Debtor.
Charles L. Wells, III, Chapter 7 Trustee, Plaintiff,
v.
THB America, LLC, Tianhai Electric North America, and Sakoma, LLC, Defendants.
Harold Zaima, an individual, Zaima Family LLC, a Michigan limited liability company, Sakoma, LLC, a Michigan limited liability company, and Kensa de Honduras S. de R.L., a Honduran company, Plaintiffs/Counter–Defendants,
v.
China Auto Electronics Group Ltd., a Bermudan corporation; Henan Tianhai Electric Co., Ltd., a Chinese corporation; Hebi Tianhai Huanqju Electric Company, Ltd., a Chinese corporation, Defendants,
and
Tianhai Electric North America, Inc., A Michigan corporation; THB America, LLC, A Michigan limited liability company, Defendants/Counter–Plaintiffs and Third Party Plaintiffs,
v.
Clements Manufacturing Liquidation Co., LLC, f/k/a Kensa, LLC, a Michigan limited Liability company, and Charles L. Wells, III, Chapter 7 Trustee, Third Party Defendants.

Bankruptcy No. 09–65895–TJT.
Adversary Nos. 10–6123, 10–7341.

United States Bankruptcy Court,
E.D. Michigan,
Southern Division.

Signed Oct. 17, 2014.

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Leonora K. Baughman, Shanna Marie Kaminski, Kilpatrick & Associates, Auburn Hills, MI, for Plaintiff.

Doron Yitzchaki, Ann Arbor, MI, Emily Hughes, Rochester, MI, for Defendants.

OPINION REGARDING SUMMARY JUDGMENT MOTIONS
THOMAS J. TUCKER, Bankruptcy Judge.
I. Introduction

These consolidated adversary proceedings are before the Court on three motions for summary judgment, namely,

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(1) the Chapter 7 Trustee's motion for summary judgment entitled “Trustee's Motion for Summary Judgment as to Counts II and III of the Trustee's Complaint in Adversary No. 10–06123 and Counts II, III, and IX in Trustee's Cross Claim in Adversary No. 10–07341” (Docket # 104 in Adv. No. 10–6123);

(2) the Chapter 7 Trustee's motion for summary judgment entitled “Trustee's Motion for Summary Judgment as to Count I in Adversary No. 10–06123 Against Defendants THB America, LLC and Tianhai Electric North America, Inc.” (Docket # 107 in Adv. No. 10–6123); and

(3) the motion for summary judgment filed by THB America, LLC (“THB”) and Tianhai Electric North America, Inc. (“TENA”), entitled “THB America, LLC and Tianhai Electric North America, Inc.'s Motion for Summary Judgment as to Claims Asserted by Trustee” (Docket # 110 in Adv. No. 10–6123).

The Court held lengthy hearings on these motions, then took them under advisement. For the reasons stated in this opinion, the Court will deny each of the motions.

II. Background

The following background facts are rather complicated, but they are undisputed.

A. The Kensa Business Entity

Prior to January 1, 2008, the Chapter 7 Debtor in this case, Clements Manufacturing Liquidation Company, LLC, was known as Kensa LLC (“Old Kensa” or “Kensa”). It was one of five related companies operating out of Michigan, Mexico, and Honduras, which designed, manufactured, distributed, and sold wiring harnesses and battery cable assemblies for automotive companies and their tier one suppliers. All of the entities were controlled, either directly or indirectly, by Harold Zaima (“Zaima”), a Japanese–American citizen of the United States, who was the President of Old Kensa. Those five Zaima-controlled entities were Old Kensa; Deckerville Wire, Inc. (“Deckerville”); Sakoma, LLC (“Sakoma”); Kensa de Honduras S. de R.L. (“Kensa Honduras”); and Kensa de Mexico de S. de C.V. (“Kensa Mexico”) (collectively, the “Kensa Business Entity” or the “Kensa Enterprise”).¹

Old Kensa designed, distributed, and sold the wiring harnesses and cable assemblies. Sakoma was a distributer of the electrical components of the wiring harnesses. Kensa Mexico and Kensa Honduras manufactured the wiring harnesses and battery cable assemblies. Deckerville was the employer of all the employees located in Deckerville, Michigan, and Sterling Heights, Michigan, who worked for Old Kensa. Because Zaima was Japanese–American, Kensa was a minority-owned business.

Old Kensa had term loans and a line of credit from Comerica Bank (“Comerica”), which were secured by liens on all of the assets of the Kensa Business Entity. Zaima

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had personally guaranteed these loans. During 2007, Old Kensa had defaulted numerous times under the terms of its loan documents with Comerica, had entered into forebearance agreements with Comerica, had defaulted under the terms of various forebearance agreements, and was having difficulty securing further loans needed for operating expenses.² As a result, during 2007, the Kensa Business Entity was in financial distress and in need of a capital infusion.

B. China Auto Electronics Group, Ltd.'s negotiations with Zaima

In May or June of 2007, China Auto Electronics Group, Ltd. (“CAE”), a foreign corporation which desired to expand its business into the United States automotive market, and its wholly owned United States subsidiary, CAE US Holdings, Inc. (“CAE US”), asked Zaima about the possibility of CAE, either directly or indirectly, purchasing some or all of the assets of, and membership interests in, the Kensa Business Entity. As a result of this inquiry, CAE and Zaima entered into negotiations, which led to the execution of a transaction term sheet in January 2008, followed by a closing of a complex set of related transactions in late February 2008. Some more specific details are set forth later in this opinion, but the following description of the related transactions, quoted from a brief filed by THB and TENA, is a good summary:

By January 2008, the parties had agreed in principle on a complicated transaction consisting of a number of steps and simultaneous, multilateral agreements, which can be summarized as follows:

1. Step 1—Form THB and THB de Honduras as new companies.

2. Step 2—THB to purchase some of the assets of Kensa and Deckerville Wire; THB de Honduras to purchase some of the assets of Kensa de Mexico and Kensa de Honduras. All outstanding debt to Comerica Bank, including term loans and line of credit, to be retired as part of closing.

3. Step 3—CAE US to acquire an 80% membership interest in THB and 80% ownership interest in THB de Honduras; Zaima to purchase the 20% membership interest in THB and 20% ownership interest in THB de Honduras.

During the negotiation process, however, it occurred to the parties that because THB was to be majority owned by CAE US, it would not be considered a minority owned business as Kensa had been and that this might hurt THB's ability to win business from some potential customers. In order to address this problem, the parties added some additional steps and agreements to the contemplated transaction, which can be summarize[d] as follows.

4. Step 4—Have one of Zaima's existing but non-operating entities, Sakoma LLC (“Sakoma”), purchase Kensa's accounts receivable and assume liabilities related to certain existing purchase orders.

5. Step 5—CAE to become 45% owner of Sakoma; Zaima to retain 55% stake in Sakoma.

6. Step 6—Execute Supply Agreement between Sakoma and THB under which Sakoma could sell THB products, and only THB products, to purchasers wishing to

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do business with a minority owned company for a 2% commission.

The sum and substance of the transaction, however, remained the same; namely, at the end of the day CAE US would have the foothold in the U.S. automotive industry it desired in the form of 80% ownership of this newly formed “THB Enterprise,” and the THB Enterprise would be free and clear of all outstanding debt to Comerica.

The parties closed their transaction on or about February 29, 2008 by simultaneously entering into the various Asset Purchase Agreements, Unit (Equity) Purchase Agreements and Supply Agreement, all necessary to consummate the steps outlined above. However, in an attempt to make a clean cutoff on the books and records of both the buyers and the sellers, the “effective date” of all of the APAs and UPAs was agreed to be January 1, 2008.

In return for its 80% stake in the THB Enterprise, CAE US provided the Kensa Enterprise cash in the amount of $9,797,881—largely used to retire the Kensa Enterprise's debts to Comerica which by the time of the closing, including the increased line of credit, totaled $9,268,330....

In addition to cash, CAE US provided the following consideration: (1) a $1,840,000 promissory note to either THB de Honduras or Kensa de Honduras to be paid upon certain conditions; (2) a holdback/earnout of $2,909,351 to be paid upon certain conditions; and [ (3) ] the assumption of certain specified Kensa Enterprise liabilities explicitly set forth in the Asset Purchase Agreements. ³

1. The Transaction Term Sheet

In January 2008, CAE, Old Kensa, Kensa Honduras, Sakoma, and Zaima entered into an agreement, entitled “China Auto Electronics Group Limited–KenSa Transaction Term Sheet” (the “Transaction Term Sheet”), which expressed their “commitments ... with respect to a transaction in which certain assets of [Old Kensa, Kensa Honduras, and Sakoma, would] be sold to certain new entities, which entities [would] be owned, directly or indirectly, by CAE, or its affiliates, and Zaima, or his successors and assignees.” ⁴ Under the Transaction Term Sheet, new entities were to be formed—THB America, LLC (“THB America”) and THB Honduras.⁵ The Transaction Term Sheet provided, in relevant part:

2. Preparation of Definitive Agreements—The terms of the transactions contemplated herein will be more particularly set forth in definitive agreements (collectively “Definitive Agreements”) that will govern the transactions. The Definitive Agreements shall be effective as of January 1, 2008. The parties will continue to negotiate the terms and begin preparation of the Definitive Agreements. The Definitive Agreements are expected to include, without limitation:

(1) Asset Purchase Agreement between [Old Kensa] and...