Opinion
Case No. 09-12869 Adversary No. 11-1116
11-02-2012
In re: SL Liquidating, Inc., et al., Debtors. Beth A. Savage, In Her Capacity as Post-Consummation Trust Administrator Plaintiff, v. Senco Brands, Inc. Defendant.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
_________________
Burton Perlman
United States Bankruptcy Judge
(Jointly Administered)
Chapter 11
Judge Burton Perlman
DECISION ON CROSS-MOTIONS FOR SUMMARY JUDGMENT
I. Background.
In this adversary proceeding, Plaintiff Beth A. Savage, Post-Consummation Trust Administrator (hereafter "Plaintiff"), occupies her position pursuant to a confirmation order of this Court of a joint plan of liquidation of SL Liquidating, Inc. (f/k/a Sencorp) and its affiliated debtors (hereafter jointly "Debtors").
This adversary proceeding is an action for avoidance of a post-petition transfer and unjust enrichment, brought by Plaintiff pursuant to 11 U.S.C. §§ 541, 549, and 550, and the common law of the state of Delaware. There are three Counts in the Complaint. Count I is entitled Avoidance of the NOL Refund Transfer Pursuant to § 549 of the Bankruptcy Code. (The term "NOL" refers to net operating losses on account of which Debtors received a refund in the amount of $1,485,012.62, referred to hereafter as the "NOL Refund.") This NOL Refund was received by Debtors but transferred to Defendant Senco Brands, Inc. (hereafter "Defendant" or "Buyer") pursuant to an Asset Purchase Agreement ("APA") entered into between the parties. In Count I, Plaintiff seeks an avoidance of that transfer pursuant to 11 U.S.C. § 549. Count II seeks recovery of the NOL Refund pursuant to 11 U.S.C. § 550. Count III seeks the same result on a theory of unjust enrichment. Defendant filed an Answer and disputes Plaintiff's claims. In addition, in its Answer, Defendant asserts five affirmative defenses.
II. Jurisdiction.
Plaintiff asserts that this Court has subject matter jurisdiction over this proceeding. Defendant, however, denies that assertion, "based upon the recent holding of the United States Supreme Court in Stern v. Marshall, 131 S. Ct. 2594 (2011)." To the extent that an issue is raised by these assertions, in their Joint Preliminary Pretrial Statement, the parties say: "To the extent that any of the claims asserted in the Complaint is determined to be a non-core proceeding Plaintiff and Defendant consents [sic] to the entry of final orders and judgments by this Court." This statement by the parties comports with the treatment of this question suggested in the forthcoming national and local bankruptcy rules where the Stern v. Marshall issue is raised. This proceeding goes forward within the jurisdiction of this Court.
III. The Present Motions.
The parties have filed cross-motions for summary judgment. In support of its Motion for Summary Judgment, Defendant submitted the following materials. Exhibit A is the Declaration of William W. Thorsness, an attorney for Defendant. Attached to Exhibit A are discovery materials received from Plaintiff in response to Defendant's request for production of documents as wells as copies of documents produced. Exhibit 1 to Exhibit A contains the APA, documents provided as required by the APA, a letter dated December 2, 2009 regarding the employment of Deloitte Tax LLP (hereafter "Deloitte") to prepare tax returns, and a PNC Bank statement for Debtor for February 27, 2010 through March 31, 2010. Exhibit 2 to Exhibit A contains Plaintiff's responses to Defendant's first set of interrogatories. Exhibit 3 to Exhibit A contains Defendant's responses to Plaintiff's first set of interrogatories, document requests, and requests for admissions. These include documents relating to Debtor's officer's and counsel's views of ownership of the NOL Refund. Exhibit B consists of Defendant's Answer and affirmative defenses in this adversary proceeding. Exhibit C is Plaintiff's initial disclosures pursuant to Bankruptcy Rule 7026.
In support of her Motion for Summary Judgment, Plaintiff provides the APA as Exhibit 1. Exhibit 2 is the Sale Order of this Court dated July 2, 2009 approving the sale of Debtors' assets to Defendant. Exhibit 3 is a copy of the Worker, Homeownership, and Business Assistant Act of 2009. Exhibit 4 is the letter agreement regarding Deloitte's retention. Exhibit 5 contains emails sent from November 24 to 30, 2009 among Douglas J. Lipke, Ronald E. Gold, Dana S. Armagno, and Marie Boyle. Exhibits 6 and 8 are financial reports and certifications of compliance with U.S. Trustee operating requirements filed with the Court for the periods ending December 31, 2009 and March 31, 2010, respectively. Exhibit 7 is an unreported case from the Court of Chancery of Delaware Postorivo v. AG Paintball Holdings, Inc., 2008 WL 343856.
IV. Issue.
The issue is, was the right to the NOL Refund an Acquired Asset under the APA?
V. Facts.
Debtors are a group of related entities which filed Chapter 11 bankruptcy cases. These cases are being jointly administered. Prior to May 8, 2009, Debtors were engaged in the business of designing, manufacturing, sourcing and distributing fastening tools and collated staples, nails and screws both domestically and abroad. On May 8, 2009, Debtors filed Chapter 11 petitions in the Bankruptcy Court. Prior to the petition date, on May 7, 2009, Debtors as "Sellers," entered into the APA with Senco Holdings, Inc. and Wynnchurch Partners Capital II, L.P. for the purchase and sale of Debtors' assets. The rights under the APA were assigned to Defendant, a corporation organized under the laws of the State of Delaware and doing business in Hamilton County, Ohio. Defendant was the purchaser of the Acquired Assets as defined in the APA. The purchase price for the Acquired Assets was forty-one million dollars ($41,000,000.00) in cash, subject to potential inventory and accounts receivable adjustments, plus the assumption of Assumed Liabilities as defined in the APA. The APA made express provision for what was sold and what was excluded from sale, as well as assumed liabilities and excluded liabilities.
On March 11, 2010, Debtors filed the First Amended Joint Plan of Liquidation of SL Liquidating, Inc. (f/k/a SENCORP) and its affiliated Debtors. This Court confirmed the plan on May 28, 2010. The plan became effective on June 16, 2010. The confirmed plan created a Trust. Plaintiff in this adversary proceeding is the Trust Administrator pursuant to the creation of that Trust. A Creditors Committee was appointed in these jointly administered bankruptcy cases.
On November 6, 2009, the President of the United States signed the Worker Homeownership, and Business Assistance Act of 2009 (the "Act"), which enables taxpayers to claim a five-year carry back period for net operating losses incurred in taxable years 2008 or 2009. Pub. L. 111-92, sec. 13. Theretofore, only a two-year carry back period was possible pursuant to federal tax law. To take advantage of the new Act, it was necessary to make an election thereunder prior to December 15, 2009. Debtors and Defendant entered into a Letter Agreement dated December 2, 2009 providing for the engagement of Deloitte to prepare an amended return for Debtors. In that Agreement, Defendant agreed to pay Deloitte's fees. Appropriate returns were filed December 15, 2009. On March 31, 2010, Debtors received a tax refund taking into account a five-year NOL carry back, in the amount of $1,485,012.62. Debtors transferred this refund, less interest generated therefrom, to Defendant. On June 24, 2011, the present adversary proceeding was filed.
VI. Summary Judgment.
As set forth in Federal Rule of Civil Procedure 56(a), made applicable to these proceedings by Federal Rule of Bankruptcy Procedure 7056, "[t]he court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." With regard to what is material, "[o]nly disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248,106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986).
The filing of cross-motions does not alter the standards governing the determination of summary judgment motions. See Taft Broad. Co. v. United States, 929 F.2d 240, 248 (6th Cir.1991); Collins, 292 B.R. at 845. But " 'cross motions for summary judgment do authorize the court to assume that there is no evidence which needs to be considered other than that which has been filed by the parties.' " Schafer v. Rapp (In re Rapp), 375 B.R. 421, 428 (Bankr. S.D. Ohio 2007) (quoting Greer v. United States, 207 F.3d 322, 326 (6th Cir. 2000)).
In re Peed, 403 B.R. 525, 529-530 (Bankr. S.D. Ohio 2009).
VII. Discussion.
In approaching the question at hand, interpretation of the APA is involved. The APA at §13.9(a) provides that "this Agreement shall be governed by, and construed in accordance with, the Laws of the State of Delaware applicable to Contracts . . . ." The following statement of Delaware contract law is instructive:
When interpreting a contract, the court's ultimate goal is to determine the parties' shared intent. Because Delaware adheres to the objective theory of contract interpretation, the court looks to the most objective indicia of that intent: the words found in the written instrument. As part of this initial review, the court ascribes to the words their "common or ordinary meaning," and interprets them as would an 'objectively reasonable third-party observer.' When the plain, common, and ordinary meaning of the words lends itself to only one reasonable interpretation, that interpretation controls the litigation.
Sassano v. CIBC World Markets Corp., 948 A.2d 453, 462 (Del. Ch. 2008)
The foregoing statement regarding interpretation of contracts is relevant because resolution of the issue before the Court is a matter of contract interpretation, for the APA is a contract. The APA contains the following at § 2.1:
Upon the terms and subject to the conditions of this Agreement, on the Closing Date, Sellers shall sell, transfer, assign, convey and deliver, or cause to be sold, transferred, assigned, conveyed and delivered, to Buyer, and Buyer shall purchase, free and clear of all Encumbrances (other than Permitted Encumbrances), all right, title and interest of Sellers in, to or under all of the properties and assets of Sellers (other than the Excluded Assets) of every kind and description wherever located, real, personal or mixed, tangible or intangible, to the extent owned, leased, licensed, used or held for use in or relating to the Business, as the same shall exist on the Closing Date (collectively, the "Acquired Assets"), including . . . :This language tells us that it was the Acquired Assets that were conveyed by Seller to Buyer by the APA. In addition, the language tells us that the Acquired Assets included any tax refunds. Looking at "the words found in the written instrument" themselves, as we are required to do under Delaware law, the right to any tax refund was an Acquired Asset. The Court holds that the "plain, common, and ordinary meaning of the words lends itself to only one reasonable interpretation," and that is that the right to the NOL Refund was transferred to Defendant by the APA. Thus, the right to the NOL Refund was an Acquired Asset. Any right to an NOL refund existed at the time of execution of the APA, and it existed before the Closing Date. Where a contract is unambiguous, summary judgment is appropriate. United Rentals, Inc. v. RAM Holdings, Inc., 937 A.2d 810, 830 (Del. Ch. 2007).
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(m) any Tax refunds; . . . .
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While the Court finds the language of the APA unambiguous, even if it were less clear, the Court would find support for its conclusion from the actions of the parties after the contract was made. Here, the question of ownership of the NOL Refund under the APA was considered by individuals who had participated in the drafting of the APA. This is relevant because "[t]he parties to an agreement know best what they meant, and their action under it is often the strongest evidence of their meaning." RESTATEMENT (SECOND) OF CONTRACTS § 202 cmt. g (1981). See also In re Eagle Picher Industries, Inc., 190 B.R. 557, 560 (Bankr. S.D. Ohio 1996); Viking Pump, Inc. v. Century Indem. Co., 2 A.3d 76, 101, n. 78 (Del. Ch. 2009). Various communications are in the record showing that participants in the drafting of the APA concluded that the NOL Refund was an Acquired Asset. Marie Boyle, an executive of Debtors at the time in question, held this view. Several attorneys of law firms that had represented Debtors during the APA negotiation also believed that the rights to the NOL Refund had been conveyed to Defendant. Because of the consensus that the NOL Refund belonged to Defendant, Deloitte was engaged to prepare appropriate tax returns. The engagement letter provided that Defendant would pay for this preparation, and this was expressly agreed to because of the opinion of representatives of the parties that the NOL Refund belonged to Defendant.
The conclusion reached by the Court here is reinforced by analogizing it to situations that have arisen under § 541(a)(1) of the Bankruptcy Code. The Code there defines property of the estate as interests in property "as of the commencement of the case." In applying that language, courts have found that tax refunds, though received post-petition, are not precluded from being considered property of the estate. See In re Hooper, 2010 WL 5155828, at *4 (Bankr. D. Ariz. 2010) (tax refund generated by the Act, post-petition, is property of the estate); In re IndyMac Bancorp, Inc., 2012 WL 1951474, at *5 (C.D. Cal. 2012) (same); Segal v. Rochelle, 382 U.S. 375, 379, 86 S. Ct. 511, 515, 15 L.Ed.2d 428 (1966). The Hooper court analyzed the decision of the Supreme Court in the Segal case as follows:
The Supreme Court relied on two key elements in concluding that the refund temporally existed at the time the bankruptcy petition was filed. First, the bankrupts had already paid taxes on the net income generated within the past three years. Id. Second, at the time of filing of the petition, it appeared that the bankrupts would have a net operating loss for the year. Id. Although the refund claim was contingent insofar as it might increase or decrease based on earnings received after the filing of the petition and before the end of the tax year, the contingent nature of the claim did not change the fact that the refund was property of the bankruptcy estate at the time the bankrupts filed their petition.
In re Hooper, 2010 WL 5155828, at *2 (Bankr. D. Ariz. 2010).
Plaintiff argues that the NOL Refund was not an Acquired Asset because the APA limited Acquired Assets to being only those assets "as the same shall exist on the Closing Date." In her view, the Closing Date was July 17, 2009, and the right to the NOL Refund did not arise until the Act was signed by the President on November 6, 2009. Plaintiff's position is without merit. The short answer to her position is that, as we are holding, the right to claim the NOL Refund was an Acquired Asset, and was transferred at the time of execution of the APA. The APA at § 2.1 transferred "all right, title and interest of Seller in, to or under. . . (m) any Tax refunds . . . ." The Act did not create the right to the NOL Refund. By extending the reach back period it only changed the value of the NOL Refund. Further, our conclusion that the right to the NOL Refund was an Acquired Asset means that it was transferred on the date of execution of the APA and no further consideration or approval by the Court was required.
Plaintiff argues that the requirement of § 2.1 of the APA, that if the NOL Refund is an Acquired Asset, it must relate "to the Business," is not met. The Court finds this argument to be without merit. The nature of the NOL Refund is that it permits recapture of revenues paid as taxes by the business in the past. Thus, it is self-evident that by its very nature the NOL Refund is related to the business. In the words of the U.S. Supreme Court in Segal, 382 U.S. at 380, the NOL Refund is "rooted in the pre-bankruptcy past" of Debtors' business. Further, the APA itself states at § 8.1(c) that "information and assistance relating to the Business and the Acquired Assets" should be exchanged for the purpose of filing any necessary tax returns. In addition, the Sale Order at ¶ 31 contemplates a relationship between taxes and business, where it states "Buyer shall not be liable for any claims . . . on account of any taxes arising, accruing, or payable under, out of, or in connection with, or in any way relating to the operation of the business . . . ." These statements demonstrate that the parties viewed tax issues to be related to the business.
Plaintiff also argues that the NOL Refund transaction is questionable because ¶ 34 of the Sale Order required that the Creditors Committee be consulted prior to any action in implementing the APA, but the Creditors Committee was never advised of the NOL Refund transaction. The Court finds this argument without merit. The Sale Order says primarily that Debtors shall consult with the committee, not Buyer (Defendant). The Sale Order provides that the Committee can object to actions by the Buyer. There is in this record no indication that the Committee has ever done so.
Finally, the Court finds that Plaintiff's claim that Defendant has been unjustly enriched is without merit. Here, the APA, a contract, was in place and pursuant to the APA, the NOL Refund was obtained. Where that is the case, there can be no unjust enrichment under Ohio or Delaware law. In re Eagle Picher Industries, Inc., 190 B.R. at 562; Bickham v. Standley, 917 N.E.2d 330, 335 (Ohio Ct. App.3d) ("[T]he doctrine of unjust enrichment cannot apply when an express contract exists.") (internal citations omitted); Nemec v. Shrader, 991 A.2d 1120, 1130 (Del. 2010) ("Delaware ... courts have consistently refused to permit a claim for unjust enrichment when the alleged wrong arises from a relationship governed by contract.") (internal quotation omitted).
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Having considered the evidence in the record before this Court, and having applied the principles of the law of Delaware, the Court concludes that there is no genuine dispute as to any material fact. The Court holds that the NOL Refund was legitimately received by Defendant pursuant to its contract rights under the APA. The Court holds that Defendant is entitled to summary judgment as a matter of law on all Counts of the Complaint.
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Defendant's Motion for Summary Judgment will be granted. The Motion for Summary Judgment of Plaintiff will be denied.
Copies to:
Daniel M. Anderson
Ice Miller LLP
250 West Street
Columbus, OH 43215
Victoria E. Powers
Ice Miller LLP
250 West Street
Columbus, OH 43215
Patrick Burns
Dinsmore & Shohl LLP
1900 Chemed Center
255 East Fifth Street
Cincinnati, OH 45202
Kim Martin Lewis
Dinsmore & Shohl LLP
1900 Chemed Center
255 East Fifth Street
Cincinnati, OH 45202
U.S. Trustee
36 E. 7th Street
Cincinnati, OH 45202
A further word with respect to the engagement of Deloitte is required. This is so because Plaintiff contends that the engagement letter is evidence that the right to the NOL Refund did not arise until the date of that agreement, that is, after the Closing Date. If this were true, the NOL Refund would not be an Acquired Asset. The Court holds this contention to be without merit.
The Deloitte engagement here in question arose in a letter dated December 2, 2009 from Marie M. Boyle, an officer of Debtors, to Ian M. Kirson at Wynnchurch Capital, Ltd. The terms of the letter are agreed to by the signature of an officer of Defendant. The letter begins by saying that it states the agreement of Debtors and Defendant regarding retention of Deloitte to prepare tax returns for the fiscal year 2008. Plaintiff's argument turns on a footnoted statement in the December 2, 2009 letter, that "any refunds paid" are an Acquired Asset under the APA.
The December 2, 2009 letter was an agreement between Debtors and Defendant. It was necessary because what would be required to obtain the NOL Refund was the filing of a tax return for Debtors. The acquiescence of Debtors to this preparation was necessary, because access to Debtors' records was required for preparation of the tax return. But the purpose of the letter was to make it clear that it was agreed that Defendant would pay for the tax return preparation. The footnote in the letter is only a "belt and suspenders" statement recognizing that the refund of Debtors' prior paid taxes would be turned over to Defendant.