Vision Metals, Inc. v. SMS Demag, Inc. (In Re Vision Metals, Inc.)Vision Metals, Inc. v. SMS Demag, Inc. (In Re Vision Metals, Inc.)
MEMORANDUM OPINION 1
This matter is before the Court on the Motion for Judgment on the Pleadings filed by SMS Demag, Inc. (“Demag”) asserting that Vision Metals, Inc. (“Vision”) has failed to state a claim on which relief can be granted in Counts MV of its Complaint.
2
For the reasons stated herein, the
I. BACKGROUND
Vision manufactured pipes, tubes, and other metal products from its facility in Rosenberg, Texas. On December 10, 1997, Vision contracted with Demag to design, sell, maintain, and supervise the installation of equipment capable of meeting specific performance guarantees (“the Original Agreement”) for an Assel and Stretch Reducing Mill Project (“the Assel Mill”). The original contract price for De-mag’s equipment and services was $16,542,000. ■
Subsequently, the Assel Mill failed to meet the specific performance guarantees as required by the Original Agreement. Because Demag purportedly had the specialized knowledge to correct the performance problems, Demag and Vision entered into another agreement on August 17, 2000 (“the First Agreement”), whereby, inter alia, Demag agreed to continue to provide parts and services in order to bring the Assel Mill into compliance with the performance guarantees and to release Vision from its obligation to make a payment due of $864,300. In exchange, Vision executed a “Certificate of Final Acceptance” acknowledging that the Assel Mill was complete and released its claims against De-mag. Any rights and obligations that the parties had in the future were to be based solely on the terms of the First Agreement.
On November 13, 2000, Vision filed a petition under chapter 11 of the Bankruptcy Code. At that time, the Assel Mill was still not functioning properly. • Nonetheless to obtain Demag’s continuing support, Vision filed a Motion for Authority to Assume the First Agreement. The Court approved the assumption of the First Agreement as being in the best interests of Vision, the estate, and its creditors. Pursuant to the Assumption Motion, Vision agreed to make four equal payments of $25,846 to Demag from January to April 2001 and to pay $16,023.90 for spare parts.
By March 2001, the Assel Mill was still not fully functional. In a further effort to address those problems, Vision and Demag entered into a second agreement on March 7, 2001 (“the Second Agreement”). Under that Agreement, Demag agreed to continue to provide services to Vision and the parties setoff certain claims they had against each other ($62,000 owed to Vision and $52,000 owed to Demag). For its remaining $10,000 claim, Vision agreed to accept a $20,000 credit for the purchase of spare parts from Demag. Vision did not file any motion for approval of the Second Agreement, and, consequently, the Court never authorized Vision’s execution of it.
On November 11, 2002, Vision filed a Complaint against Demag seeking to avoid and recover alleged preferential transfers, fraudulent conveyances, and post-petition transfers. On December 18, 2003, Demag filed a Motion for Judgment on the Pleadings as to Counts V and VI of the Complaint. In those Counts, Vision sought to vacate the Order authorizing Vision to assume the First Agreement and sought a declaratory judgment that Demag was equitably estopped from arguing that the Assumption Order barred Vision from asserting claims for breach of the Original Agreement. Vision filed a Motion seeking authority to amend those Counts of its Complaint. On July 14, 2004, the Court granted Demag’s Motion for Judgment on the Pleadings and denied Vision’s Motion to Amend the Complaint,
II. JURISDICTION
This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 1334 & 157(b)(2)(A), (E), (H), & (0).
III. DISCUSSION
Demag asserts in its Motion for Judgment on the Pleadings that Vision’s Complaint fails to state a claim upon which relief can be granted for the preferential, post-petition transfer, and fraudulent conveyance claims asserted.
A. Standard of Review
In reviewing a motion for judgment on the pleadings under Rule 12(c), courts apply the same standard as a motion under Rule 12(b)(6) for failure to state a claim upon which relief may be granted.
See, e.g., Turbe v. Gov’t of Virgin Islands,
B. Count I — Preferences
In Count I of its Complaint, Vision seeks to avoid, as preferential transfers, the payments and other concessions it made pursuant to the First Agreement. Because the First Agreement was assumed by Vision, however, it may not recover those payments as preferences.
See, e.g., Kimmelman v. The Port Auth. of N.Y. and N.J. (In re Kiwi Int’l Air Lines, Inc.),
Because Count V of the Complaint (which sought to vacate the assumption order) was denied, Vision now concedes -that Count I of its Complaint is no longer viable. Therefore, the Motion will be granted as to Count I.
C.Count II — Post-Petition Transfers
Vision alleges that $151,177.71 in post-petition transfers to Demag were made without Court authorization. Thus, it asserts that those transfers are avoidable under section 549(a). Demag contends that the transfers were either authorized by the Court or authorized by the Bankruptcy Code because they were made in the ordinary course of business. Therefore, Demag argues they are not avoidable under section 549.
Section 549(a) of the Bankruptcy Code allows a trustee, or a debtor in possession, to avoid a transfer of property of the estate that is not authorized by the court or by the Bankruptcy Code. 11 U.S.C. § 549(a). Court authorization is required to transfer property of the estate whenever that transfer occurs outside the debtor’s ordinary course of business. 11 U.S.C. § 363(b)(1). On the other hand, when a chapter 11 debtor in possession continues to operate its business, as permitted by section 1108, no court authorization is necessary for the debtor to enter transactions that fall within the ordinary course of its business. 11 U.S.C. § 363(c)(1).
Demag asserts that some of the post-petition transfers were authorized by the Court because they were paid pursuant to the First Agreement. The Court authorized Vision to assume the First Agreement; therefore, payments made pursuant to that Agreement were authorized by the Court.
See, e.g., Armstrong v. Dakota Bank & Trust Co. (In re Knudson),
Therefore, to the extent that the post-petition payments sought to be recovered by Vision are attributable to amounts owed under the First Agreement, those payments were authorized by the Court and are not subject to avoidance under section 549. Vision acknowledges this and agrees that $79,049.90 was transferred pursuant to the First Agreement and cannot be avoided under section 549.
2. Ordinary Course of Business
Vision asserts, however, that the remaining $72,127.81 in post-petition transfers to Demag were made pursuant to the Second Agreement, which was never approved by the Court. Accordingly, Vision asserts that those transfers may be avoided under section 549. Demag disagrees, arguing that the transfers were in the ordinary course of Vision’s business and did not need Court approval.
See, e.g., In re Mr. Gatti’s,
“[T]he courts have engaged in a two-step inquiry for determining whether a transaction is in ‘the ordinary course of business’: a ‘horizontal dimension’ test and a ‘vertical dimension’ test.”
In re Roth Am., Inc.,
a. Horizontal Dimension
The first step, the “horizontal dimension” test, considers “whether from an industry-wide perspective, the transaction is of the sort commonly undertaken by companies in that industry.”
Roth Am.,
Vision argues that the Second Agreement was not entered in the ordinary course of its business. It asserts that, at that time, it was a producer of carbon and alloy hot finish, cold drawn, and welded steel tubing for the automotive, utility, energy, and general manufacturing markets. Thus, Vision argues that the construction of the Assel Mill was a transaction outside the ordinary course of its business.
See, e.g., Lackawanna Iron & Coal Co. v. Farmers’ Loan & Trust Co.,
It is not, however, the construction of the Assel Mill under the Original Agreement that is at issue here. The transfers at issue were not made pursuant to the Original Agreement but pursuant to the Second Agreement. The inquiry is whether the Second Agreement was in the ordinary course of Vision’s business. Once the First Agreement was assumed, Vision issued the Certificate of Final Acceptance acknowledging that all work under the Original Agreement was completed. Accordingly, as of that date the Assel Mill was deemed to be complete. The Second Agreement dealt not with the building of the Assel Mill but only with the servicing of the Assel Mill.
It is not unusual for a company to maintain and repair its facilities. That is done in the ordinary course of business in Vision’s or any other industry. Once a capital improvement is deemed to be complete, costs associated with maintaining and repairing that improvement are generally ordinary course of business expenses.
See, e.g., Harrison v. Estate of Deutscher,
Vision argues, however, that the Second Agreement was not simply an ordinary course of business repair contract. The Second Agreement included the settlement of certain claims between Vision and De-mag which arose under the First Agreement. Specifically, in the Second Agreement, the parties detailed the various claims they had against each other under the First Agreement 4 and offset them against each other with the remaining claim of Vision (totaling $10,000) being satisfied by a $20,000 credit for purchase of spare parts from Demag.
The resolution of such issues, including the acknowledgment of mutual claims against each other and the agreement to set them off, is an ordinary course of business transaction. In fact such resolutions occur every day in every industry.
b. Vertical Dimension
The second step, the “vertical dimension” test, considers the creditors’ expectations and whether the economic risk of the transaction is different from those accepted by creditors that extended credit to the debtor pre-petition.
See, e.g., In re James A. Phillips, Inc.,
Vision argues that the transactions are not ordinary because creditors would not have expected to be subjected to the risks inherent in the Second Agreement without notice and Court approval. However, once again, the issue presented is not whether creditors would have expected Vision to give them notice of the construction of the Assel Mill. The subject of the Second Agreement was the continued servicing of the Assel Mill. As noted above, repairing equipment is done everyday and creditors expect those expenses to be paid in the ordinary course of business.
See, e.g.,
Vision argues, however, that the Second Agreement also involved the resolution of claims between Vision and Demag that required notice and approval. Fed. R. Bankr.P. 9019.
See, e.g., Peltz v. Gulfcoast Workstation Group (In re Bridge Info. Sys.),
When considered from the perspective of creditors, however, the Court is not convinced that creditors would have expected notice of the Second Agreement. Having received notice that the First Agreement was approved, which acknowledged that the Assel Mill was completed and provided only for ongoing servicing of the Mill, creditors would have expected Vision to deal with the repair of the Mill in the ordinary course of its business. The claims between Vision and Demag that are settled and setoff under the Second Agreement are de minimus in comparison to the original price of the Assel Mill and in absolute terms. They are not so significant that creditors would expect notice and Court approval.
“Section 363 is designed to allow a trustee (or debtor-in-possession) the flexibility to engage in ordinary transactions without unnecessary creditor and bankruptcy court oversight, while protecting creditors by giving them an opportunity to be heard when transactions are not ordinary.”
Roth Am.,
Consequently, the Court concludes that the parties executed the Second Agreement in the ordinary course of Vision’s business. It, and any transfers made pursuant to it, may not be avoided under section 549. Therefore, Demag’s motion to dismiss Count II of Vision’s Complaint will be granted.
D. Counts III and IV — Fraudulent Transfers
In its Complaint, Vision alleges that payments it made to Demag pre-petition were constructively fraudulent because Vision received less than reasonably equivalent value at a time when it was insolvent, had unreasonably small capital, or had incurred debts beyond its ability to repay as they matured. Vision asserts that it is entitled to avoid $15,467,755.87 in transfers to Demag dating back to February 1998. 11 U.S.C. § 548(a); Tex. Bus. & Com.Code Ann. §§ 24.005-8. In short, Vision argues that it paid Demag to erect an Assel Mill that is worthless because it does not work.
Demag contends, however, that Vision has failed to state a claim under either bankruptcy or Texas law because the Court’s approval of the First Agreement precludes Vision from attempting to over
Vision argues that the mere fact that the Original Agreement was deemed to be satisfied by the terms of the assumed First Agreement does not render the transfers made equivalent to that which was received. As stated by the Court in
Taylor v. Riverside-Franklin Prop. (In re Taylor),
If Movant provided Debtor with exactly the amount of value required under the 1996 agreement, that fact would be irrelevant to the determination of whether Debtor received reasonably equivalent value for the stock. That fact would only suggest that Movant satisfied its contractual obligations to Debtor. But the Court’s inquiry must be into whether this value received by Debtor was reasonably equivalent to the fair market value of the stock.
The fact that Vision executed the Certificate of Final Acceptance regarding the Original Agreement, however, is not the only salient term of the First Agreement that affects Vision’s rights against Demag. The First Agreement also released any claims Vision had against Demag under the Original Agreement. Paragraph 13 of the First Agreement states:
Both Parties declare that with the exception of the claims and/or obligations listed under the present Claim Settlement Agreement no further claims and/or obligations shall exist between the Buyer and Seller.
(First Agreement at ¶ 13.)
When a debtor assumes an executory contract it assumes both the benefits and burdens of that contract.
See, e.g., Delightful Music, Ltd. v. Taylor (In re Taylor),
Vision argues that the First Agreement, executed pre-petition, could not release the fraudulent transfer claims under section 548 because they did not come into existence until after Vision filed bankruptcy.
At the time the First Agreement was executed, however, Vision did have the right under Texas law to avoid the transfers it seeks to avoid in the Complaint. Since the Texas statute is virtually identical to the Bankruptcy Code, it is arguable that the release of the Texas claim also released the similar section 548 claim. Additionally, when the First Agreement was assumed by Vision in the bankruptcy case, Vision’s right to pursue fraudulent transfer claims under the Bankruptcy Code had arisen and, by assumption of the First Agreement, was waived as well. Therefore, the releases in the First Agreement preclude Vision from now asserting
Vision also alleges, however, that the First Agreement itself was a fraudulent transfer. This is contradicted by Vision’s assertions, relied upon by the Court, in the Assumption Motion that the First Agreement was in the best interest of Vision, the estate, and the creditors of the estate. Vision may not now seek to overturn the results of that assumption on the grounds that the First Agreement had little or no relative value to it.
See, e.g., Teledyne Indus., Inc. v. NLRB,
Therefore, Vision cannot maintain a fraudulent conveyance action. Demag’s motion to dismiss Counts III and IV of Vision’s Complaint will be granted.
IV. CONCLUSION
For the reasons stated above, the Court will grant Demag’s Motion to Dismiss the remaining Counts of Vision’s Complaint.
An appropriate Order is attached.
ORDER
AND NOW, this 26th day of MAY, 2005, upon consideration of the Motion for Judgment on the Pleadings filed by SMS Demag, Inc. and the response thereto filed by Vision Metals, Inc., it is hereby
ORDERED that the Motion will be GRANTED; and it is further
ORDERED that JUDGMENT IS ENTERED in favor of SMS Demag, Inc., on Counts I, II, III and IV of the Complaint.
Notes
. This Opinion constitutes the findings of fact and conclusions of law of the Court pursuant to Federal Rule of Bankruptcy Procedure 7052.
. This is the second Motion for Judgment on the Pleadings filed by Demag. On July 14, 2004, the Court granted Demag’s first Motion and dismissed Counts V and VI of Vision’s Complaint.
Vision Metals, Inc. v. SMS Demag, Inc. (In re Vision Metals, Inc.),
. Although Demag filed a request for oral argument, the Court finds oral argument unnecessary and renders its decision based on the pleadings.
. The Second Agreement noted that Vision was owed $62,000 by Demag and Demag was owed $52,000 by Vision under the First Agreement.