ZVI Guttman v. Constr. Program Grp. (In re Railworks Corp.)

• Decision Date: 21 December 2012
• Docket Number: Case No. 01-64463-JS,Adversary No. 03-5363-JS,Case No. 01-64485-JS
• Parties: In re: RAILWORKS CORPORATION, et al., Debtors ZVI GUTTMAN, Litigation Trustee, Plaintiff, v. CONSTRUCTION PROGRAM GROUP, Defendant
• Court: U.S. Bankruptcy Court — District of Maryland

In re: RAILWORKS CORPORATION, et al., DebtorsZVI GUTTMAN, Litigation Trustee, Plaintiff,

v.CONSTRUCTION PROGRAM GROUP, Defendant

Case No. 01-64463-JS

Case No. 01-64485-JS

Adversary No. 03-5363-JS

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MARYLAND

Date signed December 21, 2012

____________________________

JAMES F. SCHNEIDER

U. S. BANKRUPTCY JUDGE

(Chapter 11)

MEMORANDUM OPINION GRANTING DEFENDANT'S MOTION FOR

SUMMARY JUDGMENT AND DISMISSING COMPLAINT

This matter came on for hearing on July 28, 2011, upon cross motions for summary judgment. For the reasons stated, the plaintiff's motion will be denied, the defendant's motion will be granted and the instant complaint will be dismissed.

FINDINGS OF FACT

1. On September 20, 2001 (the "petition date"), Railworks Corporation and 21 of its corporate affiliates ("the debtors," or "Railworks") filed voluntary Chapter 11 bankruptcy petitions in this Court (Case Nos. 01-64463-SD through 01-64485-SD). The cases are jointly administered under Case No. 01-64463-SD.¹

2. The debtors described their business operations and financial condition in a motion for joint consolidation of cases that they filed on the petition date:

Railworks Corporation ("Railworks") owns or controls, directly or indirectly, thirty-two (32) U.S. and foreign subsidiaries (collectively with Railworks, "the Company"). Railworks and its twenty-two (22) U.S. subsidiaries are all co-debtors in these proceedings. (Footnote: Railworks' eight Canadian subsidiaries, one inactive, no asset U.S. subsidiary, and one Chilean subsidiary are not debtors in these proceedings. Of the six joint ventures, four are exclusively between Railworks entities and only two involve third-parties.)

The Debtors are a leading national provider of rail systems services, including construction and rehabilitation, repair and maintenance, and rail related products. The Debtors provide contracting services and rail related products to a broad range of customers including Class I railroads, transit authorities and commuter railroads,municipalities, industrial companies, and commercial enterprises. The Debtors operate principally in the U.S. and Canada, with occasional activity in Mexico and Central America. Collectively with their non-debtor affiliates, the Debtors have more than three thousand (3,000) employees. Railworks common stock is publicly traded on the NASDAQ trading system under the symbol "RWKS."

The Debtors' operations generally consist of three segments: (i) transit services; (ii) rail track services; and (iii) rail products and supplies. The transit services segment provides a variety of products and services for rail based mass transit systems, including construction and rehabilitation of track and other forms of fixed guideways , installation of signaling, communication and electrical systems, and construction, rehabilitation and installation of ancillary transit related subsystems such as elevators, escalators, heating and air conditioning. The rail track services segment provides design, engineering, construction, rehabilitation and repair and maintenance of track systems for railroads and industry. The rail products and supplies segment provides specialty wood and concrete products, rail fastening systems and specialized track maintenance services.

As of June 30, 2001, the Company had total assets of $569,658,000, and total liabilities of $523,289,000 (book value). For the three (3) months ending June 30, 2001, the Company sustained a net loss of $37.5 million. . . .

Debtors' Motion for Order Directing Joint Administration [P. 2], ¶¶ 5-8, filed September 20, 2001.

3. On December 5, 2001, the debtors filed their Statement of Financial Affairs [P. 330] and Schedules [P. 331], which indicated that as of the petition date, the debtors were insolvent, with assets totaling $ 167,693,102, as opposed to liabilities of $590,241,392. Summary of Schedules 4. On September 23, 2002, the debtors filed a Modified Second Amended Joint Plan of Reorganization (the "Plan").

5. On October 1, 2002, Judge Derby confirmed the Plan by order [P. 1274]. The Plan provided for two separate entities, namely, the "Reorganized Debtor" and a "Litigation Trust" ("the Trust"). Plan, §§ 5.15 and 5.25. While most of the assets of the estate were transferred to the Reorganized Debtor, the Plan transferred so-called "Litigation Trust Claims" to the Litigation Trustee. As defined by the Plan, Litigation Trust Claims ("Trust Claims") included "claims for the avoidance of any transfer by or obligation of the Estates or the Debtors under chapter 5 of the Bankruptcy Code or the recovery of the value of such transfer." Plan, § I.A.1.88.

6. Zvi Guttman was appointed Litigation Trustee ("the Trustee"). In accordance with the Plan, the Reorganized Debtors and the Trustee entered into a Litigation Trust Agreement ("LTA"), Section 8.1(h) of which conferred upon him the exclusive power and discretion to prosecute the Trust claims.

7. On September 16, 2003, the Trustee filed the instant complaint against the defendant, Construction Program Group ("the defendant," or "CPG") to recover thesum of $2,178,041, which the complaint alleged was paid by Railworks to CPG during the 90-day preference period, comprised of the following payments:²

+------------------------------------------------+
                ¦Check #  ¦Check Date  ¦Clear Date   ¦Amount     ¦
                +---------+------------+-------------+-----------¦
                ¦8554     ¦07/20/2001  ¦07/24/2001   ¦$472,788.75¦
                +---------+------------+-------------+-----------¦
                ¦8575     ¦07/27/2001  ¦08/02/2001   ¦472,787.75 ¦
                +---------+------------+-------------+-----------¦
                ¦8601     ¦08/10/2001  ¦08/15/2001   ¦472,788.75 ¦
                +---------+------------+-------------+-----------¦
                ¦8261     ¦08/17/2001  ¦08/23/2001   ¦695,141.75 ¦
                +---------+------------+-------------+-----------¦
                ¦TOTAL    ¦            ¦$2,113,507.00¦           ¦
                +------------------------------------------------+
                

8. The complaint alleged that during the year 2001, CPG invoiced Railworks for certain insurance policies covering general liability, automobile and workers compensation that were obtained from TIG Insurance Company ("TIG"). Invoicesdated January 31, 2001 and February 2, 2001. Plaintiff's Exhibit No. 1. The complaint further alleged that CPG negotiated all four checks during the preference period.

9. Sherwood Insurance Services ("Sherwood)" was predecessor in interest to CPG with respect to a certain General Agency Agreement by and between TIG and Sherwood, that was effective on December 15, 1996 (the "Agreement"). Plaintiff's Exhibit No. 4. See also Response to Interrogatory No. 1, at 3 of Defendant's Response to Plaintiff's First Set of Interrogatories. Plaintiff's Exhibit No. 5.

10. Under the Agreement, CPG acted as "Managing General Underwriter" ("MGU") for the insurance coverage that TIG, the insurance carrier and insurer, provided to Railworks, as insured.

11. According to the deposition testimony of Donald P. Koziol ("Koziol"), corporate designee of CPG, who identified himself as an employee of Aon Corporation ("Aon") and the Chief Executive Officer of Aon Underwriting Managers:³

. . . [T]he way that the managing general underwriting business works, and this may help understand the whole concept, so that the client of the managing general underwriter is the carrier, and in this case the managing general underwriter possesses an intellectual property that the carrier wants to have access to.

So if a carrier believes that the managing general underwriter has an expertise that doesn't exist within the carrier's portfolio, . . . thecarrier will contract with the managing general underwriter to perform certain services for the carrier.

And those services for the carrier will vary from time to time, but generally will include the fact that . . . the managing general underwriter will determine the underwriting criteria, and they'll determine the pricing, and they'll be responsible for marketing on behalf of the carrier. In some cases that will extend to the handling of the claims.

And so the managing general underwriting agreement with the carrier will outline the fees and compensation that the carrier will give to the managing general underwriter for carrying out those services for the carrier. And in this case, one must understand that if the carrier becomes unhappy with the performance of the managing general underwriter, then the managing general underwriter is in fact out of business, because it has nothing to sell, which is why the carrier is the client, if you will, of the managing general underwriter.

. . [O]ne of the services that the managing general underwriter would provide for the carrier is to collect premium payments which payments are then passed on to the carrier in exchange for the carrier providing coverage for the person that's seeking insurance.

Deposition of Koziol, February 18, 2011, T. 15, line 23 through T. 17, line 8. Plaintiff's Exhibit No. 6.

12. Section 5.1 of the Agreement provided as follows:

Agent [CPG] shall be liable for and shall pay to Company [TIG], all net premiums attributable to the Policies produced hereunder, whether or not such premiums have been collected by Agent less Commissions, as defined in Section 6.1 of this Agreement.

Agency Agreement. Plaintiff's Exhibit 4 at p. 5, Section 5.1. 13. Section 5.2 of the Agreement provided as follows:

5.2. All premiums collected by the Agent are the property of the Company and shall be held in trust on behalf of Company in a fiduciary capacity ("Premium Trust Funds") and shall be deposited and maintained in an account separate and segregated from Agent's own funds or, at Agent's option, the Premium Trust Funds may be maintained in a pooled account maintained by affiliates of Agent for the investment of fiduciary funds ("the Premium Trust Account"). The Premium Trust Account shall be maintained in an account at least equal to the premiums (unpaid to Company), and return premiums (unpaid to policyholders or

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