Phoenix Restaurant Group, Inc. v. Proficient Food Co. (In Re Phoenix Restaurant Group, Inc.)Phoenix Restaurant Group, Inc. v. Proficient Food Co. (In Re Phoenix Restaurant Group, Inc.)
MEMORANDUM
Pending before the Court is the timely direct appeal from the Bankruptcy Court’s Final Judgment, entered in this adversary action on July 28, 2006, in favor of the PlaintiffiAppellee Plan Administrator and against Defendant/Appellant Proficient Food Company in the amount of $519,077.63. The Court has jurisdiction of the appeal pursuant to
I. FACTS AND PROCEDURAL HISTORY
Phoenix Restaurant Group, Inc. (“PRG”), and its affiliates Denam, Inc., Phoenix Foods, Inc., Black-Eyed Pea U.S.A., Inc., Prufroek Restaurants of Kansas, Inc., and Texas BEP, L.P., operated numerous Denny’s and Black-Eyed Pea Restaurants in several states. Proficient Food Company (“Proficient”) served as a vital supplier of food products to PRG’s Denny’s Restaurants prior to and during this bankruptcy proceeding.
On October 18, 2001 (“the Petition Date”), six creditors of PRG commenced an involuntary Chapter 7 bankruptcy case against PRG in Florida. On October 29, 2001, the Florida bankruptcy court transferred the proceeding to the Middle District of Tennessee where PRG’s principal executive offices are located. On October 31, 2001, PRG sought to convert the involuntary Chapter 7 case to a reorganization proceeding under Chapter 11 of the Bankruptcy Code. PRG’s affiliates filed voluntary Chapter 11 petitions on the same day.
On November 2, 2001, Proficient sent a letter to counsel for PRG, pursuant to
On November 6, 2001, the Bankruptcy Court granted the relief requested by PRG and its affiliates, and converted PRG’s involuntary Chapter 7 case to a Chapter 11 proceeding. On November 13, 2001, the U.S. Trustee appointed five creditors, including Proficient, to the Creditors’ Committee. On November 14, 2001, the Bankruptcy Court entered an Order consolidating the cases and providing for their joint administration. During these pro
On November 16, 2001, PRG filed a motion seeking discretionary authority to make payments to Proficient as a critical vendor (“the Critical Vendor Motion”). (Docket Entry No. 1, Part 38.) PRG stated in the Critical Vendor Motion that Proficient was the only supplier authorized and approved by Denny’s to provide necessary inventory, PRG purchased approximately $250,000 of inventory from Proficient each week, and Proficient had threatened to stop supplying inventory unless PRG made arrangements for payments on Proficient’s pre-petition claims of approximately $7 million. The Critical Vendor Motion set forth a list of terms for the making of these payments to Proficient.
The U.S. Trustee, the Creditors’ Committee and LH Leasing Company objected to the Critical Vendor Motion, but ultimately a settlement was reached and the Bankruptcy Court entered an agreed Order on December 12, 2001. (Docket Entry No. 1, Part 36.) The Order provided that the “total to be paid to Proficient ... on account of its prepetition claims, PACA claims, and Reclamation claims is $900,000 (‘Critical Vendor Payment’).” (Id. at Supplemental Terms to Critical Vendor Motion.) Further, “[f|unds received by or on behalf of Proficient ... since [the] Petition Date in excess of cost of goods sold since the Petition Date will be credited against the Critical Vendor Payment (approximately $311,000 through November 26, 2001).” (Id.) The “[r]emainder of the Critical Vendor Payment will be paid $50,000 per week, by premium of $10,000 per day in wire transfer payments.” (Id.) The “[bjalance of $900,000 will be paid at closing of sale as a super priority claim, junior only to Debtor in Possession financing liens. However, the balance loses its super priority status in the event of conversion to a chapter 7 case; in that instance, it will be on the same priority as other chapter 11 administrative claims.” (Id.)
The Order further provided that, “[w]hen the Order approving the Critical Vendor Motion is final and not subject to appeal, Proficient Food Company’s PACA claim of approximately $194,000 is waived.” (Id.) Of particular importance to this appeal, the Order provided that “[a]ll Critical Vendor Payments will be applied first to payment of the reclamation claim of approximately $540,000.” (Id.) In return for these payments, Proficient agreed to continue to sell goods to PRG through March 30, 2002.(Id.)
On October 23, 2002, the Bankruptcy Court confirmed the First Amended Joint Liquidating Plan of Reorganization (“the Plan”). Pursuant to the Confirmation Order, the estates of PRG and its affiliates were consolidated into a single estate to be administered by PENTA Advisory Services as Plan Administrator. Under the Plan, the Plan Administrator had all of the powers and duties of a trustee.
On October 18, 2003, the Plan Administrator filed over 200 adversary proceedings to avoid preferential transfers under
II. STANDARDS OF REVIEW
Under
The standard of review to determine if a lower court properly applied principles of judicial estoppel is
de novo. Browning v. Levy,
This Court reviews the Bankruptcy Court’s findings of fact for clear error and its conclusions of law
de novo. Rembert v. AT & T Univ. Card Serv. (In re Rembert),
III. ANALYSIS
A. Proficient’s “New Value” Defense
Proficient raised as its principal statutory defense to the preference action that Proficient provided “new value” to PRG in the form of ongoing inventory in return for PRG’s pre-petition payments. Proficient challenges the Bankruptcy Court’s holding that satisfaction of Proficient’s reclamation claim in the amount of $540,000 precluded Proficient’s “new value” defense to that amount.
The trustee in bankruptcy may recover for the benefit of all creditors those transfers made by the debtor within ninety days of bankruptcy which have the effect of preferring one creditor over another.
The statutory defense found in
(c) The trustee may not avoid under this section a transfer—
(4) to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor—
(A) not secured by an otherwise unavoidable security interest; and
(B) on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor[J
The logic of this defense is that an otherwise preferential transfer is not avoidable to the extent that, after the transfer, the creditor gave the debtor “new value” in a form that replenished the debtor. See, e.g., Williams v. Agama Sys., Inc. (In re Micro Innovations Corp.),185 F.3d 329 , 336 (5th Cir.1999). Replenishing the debtor for purposes of the§ 547(c)(4) defense has several facets. Fundamentally, the debtor must receive “new value” defined by§ 547(a)(2) as follows:
(a) In this section—
(2) “new value” means money or money’s worth in goods, services, or new credit, or release by a transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the debt- or or the trustee under any applicable law, including proceeds of such property, but does not include an obligation substituted for an existing obligation.
New value given after a preferential transfer helps the defendant only if it is not secured by an unavoidable security interest.
Also, the new value must not have been paid for by the debtor with a transfer that cannot itself be avoided.11 U.S.C. § 547(c)(4)(B) . In other words, the new value must remain an enhancement of the debtor notwithstanding transfers (typically payments) to the creditor by the debtor after the new value was given. A payment by the debtor to the creditor after the creditor gave new value does not unravel the defense if the payment can itself be recovered as an avoidable transfer.
(Docket Entry No. 1, Part 24, Memorandum at 12-13.) As the Bankruptcy Court noted, the policies behind
The Bankruptcy Court did not accept the trustee’s position that the post-petition payments made by the debtor-in-possession to Proficient under the Critical Vendor Order were “otherwise unavoidable” transfers that could be used to offset the pre-petition “new value” given by Proficient. The Bankruptcy Court reasoned that the preference window of
Arizona Fast Foods reaches the right result with respect to the effect of reclamation on the new value defense, but slightly different logic explains that outcome. As a matter of statutory interpretation, post petition payment through the confirmed plan in Arizona Fast Foods, or, as here, by the Debtors-in-Possession, was not a transfer by the debtor for§ 547(c)(4)(B) purposes. Accordingly, the post petition payment cannot be an “otherwise unavoidable” transfer by the debtor that defeats the prepetition new value for which it paid.
However, goods shipped on the eve of bankruptcy that are subject to reclamation are not the same “money or money’s worth, as goods shipped free of the seller’s strings.” See11 U.S.C. § 547(a)(2) . In the same sense that goods subject to a PACA trust do not enhance the debtor because the value of those goods is held in trust for the growers and shippers, goods subject to reclamation do not enhance the debtor to the extent the value of those goods can be reclaimed.
Here, the new value given by Proficient must be reduced to reflect its reclamation claim — not because it received an otherwise avoidable payment after the petition' — -but because the new value given to the Debtors prepetition must be discounted to reflect the right of reclamation preserved by§ 546(c) . Put another way, the [trustee] cannot use post petition payments under the Critical Vendor Order as “otherwise unavoidable” transfers that deplete the prepetition new value given by Proficient; but Proficient in its calculations failed to adjust new value during the preference period to reflect goods subject to reclamation.
(Docket Entry No. 1, Part 24, Memorandum at 20-21.)
The Court concludes that the Bankruptcy Court correctly analyzed this issue. Proficient had the right either to reclaim goods of a value of $540,000 or have its reclamation claim enhanced in priority over other creditors to that amount.
Although Proficient contends that
Yen-km^-Majestic Paint Corp. v. Wheeling-Pittsburgh Steel Corp. (In re Pittsburgh-Canfield Corp.),
The right of reclamation is a rescissional remedy, based upon the theory that the seller has been defrauded.... Because the buyer retains the apparent authority to deal with goods, the sale of goods to a good faith purchaser cuts off a seller’s right to reclaim. Id. Most secured creditors are good faith purchasers under the Uniform Commercial Code, thus the rights of a reclaiming seller generallywill be inferior to those of a secured creditor who has a security interest[ ] in the goods but superior to those of the buyer’s general unsecured creditors. Id. at 284.
Id.
These principles reflect the operation of
Another case cited by Proficient,
Gonzales v. Nabisco Div. of Kraft Foods, Inc. (In re Furr’s Supermarkets, Inc.),
Whatever benefit PRG obtained by Proficient’s shipment of goods to PRG was negated by Proficient’s right of reclamation in those same goods. Therefore, Proficient did not replenish PRG in the amount of the reclamation claim, $540,000, and the Bankruptcy Court properly held that $540,000 did not constitute “new value” for the purpose of Proficient’s statutory defense under
B. Amendment of the Complaint
This preference action concerned numerous prepetition checks written by PRG to Proficient. Two of the checks, Check No. 16855 in the amount of $107,919.30 and Check No. 171116 in the amount of $216,830.29, were dated October 3, 2001, but did not clear PRG’s bank until October 18, 2001, the Petition Date. On February 11, 2005, approximately one month prior to trial and after discovery was closed, the Plan Administrator filed a motion seeking leave to amend the preference complaint to add an alternative cause of action in an effort to avoid these two post-petition transfers pursuant to
The Bankruptcy Court heard arguments on the motion (March 7, 2005 & July 19, 2005 Hr’g Trs.) and considered a subsequent Stipulation of Facts submitted by
The preference complaint included a cause of action under
Proficient did not establish below that the Plan Administrator engaged in undue delay in filing the motion to amend the complaint. The Plan Administrator stated that it did not realize until it received Proficient’s discovery responses that two checks did not clear the bank until October 18. The Bankruptcy Court observed that it was not until January 24, 2005, through Proficient’s discovery responses, that the issue first crystalized that two checks were not honored until after the Petition Date and that they constituted post-petition transfers. (July 19, 2005 Hr’g Tr. at 28.) Two weeks after that realization on February 11, 2005, the Plan Administrator sought to amend the complaint. The Bankruptcy Court determined that a delay of two weeks to seek leave to amend did not constitute undue delay in seeking amendment. There was no lack of notice to Proficient because Proficient was the first party to raise the issue. The Bankruptcy Court did not clearly err in finding there was no bad faith on the part of the Plan Administrator in seeking the amendment where Proficient did not submit any evidence of bad faith. Likewise, there was no proof of repeated failure to cure deficiencies by previous amendments and no
As far as undue prejudice to Proficient, the Bankruptcy Court recognized there was some prejudice to Proficient because its defenses could change in response to the new legal theory. However, the Bankruptcy Court properly held that the prejudice was not undue, and the Bankruptcy Court ameliorated any potential undue prejudice by permitting Proficient to undertake additional discovery. (Id. at 33, 35.) The Court can find no error of fact or law in the Bankruptcy Court’s decision on this issue.
C. Judicial Estoppel
The Critical Vendor Motion filed by PRG promised payment of Proficient’s reclamation claim, without specifically quantifying the claim. The trustee objected, and this objection, among others, was resolved in the Supplemental Terms that were attached and incorporated into the Critical Vendor Order on December 12, 2001. Of the total $900,000 the debtor-in-possession paid to Proficient post-petition by virtue of the Critical Vendor Order, $540,000 applied to Proficient’s reclamation claim. Thus, although Proficient now contends that there was a senior lien creditor who cut off all of Proficient’s reclamation rights and “there was no factual basis upon which to legally conclude that Proficient’s reclamation demand had reached any goods much less any that it might have been permitted actually to reclaim[,]” (Opening Brief at 30), it nonetheless remains fact that Proficient was fully satisfied for its reclamation claim.
In its Memorandum in support of its ' Motion for Summary Judgment, Proficient acknowledged that its reclamation claim was paid through the Critical Vendor Order, but nonetheless argued that payment of the reclamation claim should not preclude Proficient from counting the same amount in support of its “new value” defense. (Docket Entry No. 1, Part 9 at 5-9.) When the Bankruptcy Court properly rejected Proficient’s contention, as previously discussed above, Proficient then reversed its position and argued that “it did not really have a valid reclamation claim at the time of the Critical Vendor Motion or Order[,]” (Docket Entry No. 1, Part 7 at 13), and “[ujpon that disclaimer, Proficient would construct a new value defense under
The Bankruptcy Court wrote that Proficient’s “about-face has judicial estop-pel written all over it.” (Docket Entry No. 2, Part 7.) The Bankruptcy Court looked to
Excel Energy, Inc. v. Smith (In re Commonwealth Institutional Secs., Inc.),
The Bankruptcy Court concluded that Proficient was “judicially estopped to argue that it never had valid reclamation claims for purposes of the new value defense in this adversary proceeding.”
(Id.
at 14.) Early in the bankruptcy proceeding, before the adversary action was filed, Proficient represented to the debtors, the
It is disingenuous for Proficient to argue before this Court, citing
Edwards v. Aetna Life Ins. Co.,
The Court can find no error of law or fact in the Bankruptcy Court’s application of judicial estoppel. To allow Proficient to proceed with its “new and inconsistent position would give Proficient a windfall in the context of this preference litigation.” (Docket Entry No. 2, Part 7 at 14.) Proficient had been paid in full for the reclamation rights it previously asserted and those payments were not otherwise avoidable. The Bankruptcy Court properly refused to allow Proficient to adopt a wholly different position in order to reduce the preference claim “by an equal amount — a second recovery of the same value.” (Id. at 14-15.)
D. The Bankruptcy Court did not disregard the history of the case
1. The Critical Vendor designation did not foreclose the subsequent preference action
Proficient contends that, once it was designated a Critical Vendor, it was no longer similarly situated to other unsecured creditors and of the same class as such creditors. Rather, its interests were separate and distinct from those of other unsecured creditors, and its treatment and relationship with the debtors were greatly altered, relying on
In re Superior Toy & Mfg. Co.,
Similarly to
HLI Creditor Trust v. Export Corp. (In re Hayes Lemmerz Int’l),
This case is fundamentally different than Superior Toy. There is no statute that required the Critical Vendor payments on account of prepetition debt or that compelled Proficient to accept performance by the Debtors-in-Possession. Section 365 required the licensor to accept the debtor’s performance in Superi- or Toy once the debtor paid the royalties due before assumption. Proficient had a choice to deal or not with the Debtors-in-Possession. Here, there was no contract or lease assumed and no statutory protection enveloped Proficient’s receipt of prepetition payments. The Critical Vendor Motion specifically stated that nothing contained therein would be deemed an assumption of any contract or agreement between the Debtors and Proficient. (Critical Vendor Motion at 9.)
(Docket Entry No. 1, Part 24, Memorandum at 27.) The Court concludes that the Bankruptcy Court correctly determined that the subsequent preference action against Proficient was not waived because Proficient was designated a Critical Vendor early in the proceeding.
2. Proficient was not the beneficiary of a general release of liability
The First Amended Plan contained a broad release for the benefit of Creditors’ Committee members, of which Proficient was one, as follows:
From and after the Effective Date, the Committee and its members ... shall be and hereby are fully exculpated by all Persons and Entities, including, without limitation, holders of Claims and other parties in interest, from any and all claims, causes of action, and other assertions of liability except for their own gross negligence or ultra vires acts arising out of the discharge of the powers and duties conferred upon the Committee by the Bankruptcy Code or any order of the Bankruptcy Court. No holder of a Claim or other party in interest will have or pursue any claim or cause of action against the Committee.
(Docket Entry No. 1, Part 10, Ex. H at ¶ 18.13.) Proficient claims that it was the. beneficiary of this general release, the release covered this preference action, and therefore, the Bankruptcy Court should have granted summary judgment in Proficient’s favor.
The Court fails to see how this preference action could be said to arise “out of the discharge of the powers and duties conferred upon the Committee by the Bankruptcy Code or any order of the Bankruptcy Court.” Furthermore, although Proficient contends that the preference action against it is covered by the language quoted above, the clause makes no reference whatsoever to “Bankruptcy Causes of Action,” “powers granted to a Trustee under the Bankruptcy Code,” or “avoidance claims.”
Section 1.15 of the Confirmed Plan defines “Bankruptcy Causes of Action” to include “[a]ll claims, actions, causes of action [and] suits, ... arising under the Bankruptcy Code (including but not limited to, all claims and any avoidance ... actions against insiders and/or any other Entities under sections .... 547 [and] 549 ... of the Bankruptcy Code or otherwise) of the Debtors, the Debtors in Possession, and/or the Post-Confirmation Estate ... .that are or may be instituted by the Plan Administrator[.]” Section 18.12.1 provides that the “Plan Administrator
Neither the Order for Relief nor the instant preference action arose out of Proficient’s discharge of Creditor Committee power and duties. The preference action arose out of PRG’s pre-petition payments to Proficient, which the Plan Administrator sued to avoid. The right of the Plan Administrator to bring this action is specifically reserved in the Confirmed Plan, and Proficient has pointed to no express release from this preference liability. The language of the Confirmed Plan is plain and straightforward, and no ambiguity is presented. It would be unreasonable and illogical to read the Creditors’ Committee Exculpation Provision as a release of Proficient from the preference claims. The Bankruptcy Court properly held that the Committee’s general release did not absolve Proficient from liability in this preference action.
3. The doctrines of res judicata and judicial estoppel did not preclude this action
Citing
Browning v. Levy,
The Bankruptcy Court correctly held that the facts here present a clearer case than
Elk Horn Coal Co, LLC v. Conveyor Mfg. & Supply, Inc. (In re Pen Holdings, Inc.),
E. Delivery of post-petition goods did not support Proficient’s defense under
Finally, Proficient contends that the Bankruptcy Court erred in holding that
Section 549(b) excludes from avoidance: a transfer made after the commencement of such case but before the order for relief to the extent any value, including services, but not including satisfaction or securing of a debt that arose before the commencement of the case, is given after the commencement of the case in exchange for such transfer, notwithstanding any notice or knowledge of the case that the transferee has.
Proficient contends Check Numbers 16855 and 171116 cleared the Debtors’ bank post-petition during the “gap” period, and Proficient also during the “gap” period delivered goods to the Debtors that had a value of more than the amount of the post-petition transfers. Proficient contends these post-petition deliveries of food inventory allowed the Debtors to operate and precluded Debtors from incurring substantially greater costs than would have resulted if the Debtors had been required to purchase goods from another supplier. Relying on
In re Oakwood Markets, Inc.,
The Sixth Circuit stated in footnote 1 of
Oakwood Markets,
however, that a payment for an arrearage owed by Oakwood Properties could not be excepted from avoidance under
IV. CONCLUSION
For all of the reasons stated, the Final Judgment of the Bankruptcy Court in favor of the Plan Administrator in the amount of $519,077.63 and against Proficient will be AFFIRMED. An appropriate Order will be entered.
Notes
. Henceforth in this opinion, "PRG” will refer to both PRG and its affiliates.