Opinion
Civ. No. JFM-99-42.
September 8, 1999.
Bankruptcy No. 96-59066-JFS
MEMORANDUM
Appellant Martin Marietta Materials, Inc. ("Martin Marietta") has filed this appeal from a ruling of the United States Bankruptcy Court for the District of Maryland. In that ruling, the Bankruptcy Court granted Appellee Redland Genstar, Inc.'s ("RGI") motion to dismiss Counts II through VI and Count VIII of Martin Marietta's complaint. The judgment of the Bankruptcy Court will be affirmed in part and reversed in part.
The complaint did not contain a Count VII.
I.
On September 19, 1996, creditors filed an involuntary petition under Chapter 11 of the Bankruptcy Code against Bryn Awel Corporation. RGI submitted an offer to purchase Bryn Awel's assets and on October 1, 1996, the Bankruptcy Court ordered the RGI offer submitted for approval in accordance with section 363 of the Bankruptcy Code.
On October 4, 1996, a notice was sent to all interested parties describing RGI's offer and informing them of an October 11, 1996 hearing to consider approval of the sale. Martin Marietta's counsel attended the hearing. At the opening of the hearing, Bryn Awel's counsel reported that Bryn Awel and RGI had reached a final Asset Purchase Agreement ("APA") late the previous day. The parties then sought approval of the APA, which was substantially similar to RGI's bid.
Under both the terms of the bid attached to the sale motion and the APA, RGI was to pay $12 million at closing to Mercantile Safe Deposit Trust Company ("Mercantile") in satisfaction of Mercantile's $15 million secured claim against Bryn Awel. In order to obtain Mercantile's consent to the sale and to Bryn Awel's continued use of Mercantile's collateral pending approval of the APA and closing, RGI agreed to indemnify Mercantile for any cash Bryn Awel used until closing. Mercantile and RGI subsequently began discussions about RGI purchasing Mercantile's lien position. At the October 11, 1996 hearing, it was announced that RGI and Mercantile had reached an agreement that morning whereby RGI would purchase Mercantile's lien position through a transaction independent of the APA. RGI, in effect, was stepping into Mercantile's shoes and assumed Mercantile's risk in the event the deal did not close. The purchase price of the lien, $11.3 million, was not mentioned at the hearing.
The APA's provision through which unsecured creditors were to be paid differed from those outlined in the bid attached to the sale motion. Pursuant to the terms of the APA, as explained during the hearing, seventy-five percent of the accounts receivable recovered in excess of $10.6 million was to be paid to unsecured creditors (the "Threshold formula"). Bryn Awel represented that accounts receivable were approximately $12 million.
Bryn Awel's surety, Seaboard, sought to be indemnified from any further obligation on performance and payment bonds issued on Bryn Awel projects. Accordingly, the APA provided that RGI was to negotiate an agreement with Seaboard as a condition precedent to closing whereby Seaboard would pay "not less than $5.5 million" in exchange for RGI indemnification. Seaboard's counsel stated during the October 11, 1996 hearing that Seaboard had not yet reached an agreement with RGI, but that one was expected before closing. Eventually, Seaboard paid RGI $6.17 million.
II.
Martin Marietta appeals the Bankruptcy Court's dismissal of Counts II, III, IV, V, VI, and VIII of its complaint. In Count II, Martin Marietta brought a third party beneficiary claim arising out of RGI's alleged failure to apply all collected accounts receivable to the $10.6 million threshold level after which unsecured creditors are paid. In Counts III through VI, Martin Marietta alleged unjust enrichment. Counts III and IV alleged that by adopting the Threshold formula for unsecured creditors in the APA rather than the formula provided for in the original bid, RGI avoided paying Bryn Awel's unsecured creditors and has, thereby, been unjustly enriched. Count V alleged that RGI was unjustly enriched by failing to disclose the actual purchase price of Mercantile's lien, which was $700,000 less than the amount RGI would have paid Mercantile at closing had Mercantile not sold its lien. Count VI alleged that RGI was unjustly enriched when it received a payment of $6.17 million from Seaboard rather than the minimum $5.5 million required by the APA. Finally, Count VIII alleged that RGI committed negligent misrepresentation throughout the October 11, 1996 hearing.
A.
Although styled as "independent causes of action," Counts III, IV, V and VIII constitute collateral attacks on the Bankruptcy Court's Order approving the sale of Bryn Awel's assets to RGI. Martin Marietta's contentions are that the Threshold formula does not provide unsecured creditors sufficient protection and that RGI's purchase of Mercantile's lien for $11.3 million resulted in a $700,000 discount which should have been shared with Bryn Awel's creditors. Regardless of the merits of these contentions, they are merely arguments that the sale should not have been approved because the terms were unjust and/or the sale price too low. See In re Met-L-Wood Corp., 861 F.2d 1012, 1018 (7th Cir. 1988) (interpreting suit not seeking to rescind sale, but seeking heavy damages from purchaser and others as a collateral attack on judgment confirming sale).
Participants in the proceedings before a bankruptcy court wishing to collaterally challenge an order authorizing the sale of a debtor's assets may do so only by way of a motion for relief from that order pursuant to Fed.R.Civ.P. 60(b), which is made applicable to bankruptcy proceedings pursuant to Bankruptcy Rule 9024. See In re Alan Gable Oil Dev. Co., No. 91-1526, 1992 WL 329419, at *3 (4th Cir. Nov. 12, 1992) (citing In re Met-L-Wood Corp., 861 F.2d 1012 (7th Cir. 1988)). They are barred by res judicata from bringing a lawsuit to nullify the sale. See Met-L-Wood Corp., 861 F.2d at 1016.
The doctrine of res judicata precludes parties from raising claims or issues that they could have, or should have, raised before entry of a sale order in the Bankruptcy Court. See In re Varat Enters., Inc., 81 F.3d 1310, 1315 (4th Cir. 1996).
[C]laim preclusion occurs when three conditions are satisfied: 1) the prior judgment was final and on the merits, and rendered by a court of competent jurisdiction in accordance with the requirements of due process; 2) the parties are identical, or in privity, in the two actions; and 3) the claims in the second matter are based upon the same cause of action involved in the earlier proceeding.Id.
The order approving the sale of Bryn Awel's assets to RGI constituted a final judgment on the merits, and the Bankruptcy Court's jurisdiction is undisputed. Second, Martin Marietta and RGI attended and participated in the October 11, 1996 hearing.See Met-L-Wood Corp., 861 F.2d at 1016 (recognizing that parties appearing before bankruptcy court during pre-order hearings were parties to sale proceeding and therefore barred by res judicata from bringing suit to nullify sale). Third, Martin Marietta's objections to the terms of the APA stem from the same operative facts addressed during the October 11, 1996 hearing before the Bankruptcy Court. Accordingly, the October 11, 1996 Order operates as an absolute bar to Counts III, IV, V, and VIII in this proceeding.
Martin Marietta's contention that it did not have a full and fair opportunity to litigate these claims is without merit. The APA's Threshold formula for unsecured creditors was announced and explained in detail at the hearing. Parties had the opportunity to ask questions about, or object to, the formula and counsel for one unsecured creditor did in fact ask for, and received, a clarification. Martin Marietta's counsel, however, remained silent.
Martin Marietta also had the opportunity to question RGI's purchase of Mercantile's lien position during the hearing. Counsel for Bryn Awel, Mercantile, and RGI made it clear at the hearing that RGI was purchasing Mercantile's position in the case and stepping into Mercantile's shoes. Accordingly, RGI was assuming Mercantile's risk that the APA would not close. It is patently unreasonable to think that RGI would receive no discount from the $12 million Mercantile expected once the APA closed in return for relieving Mercantile of the risk that the APA would not close. Martin Marietta is precluded from raising claims that could have been raised before the Bankruptcy Court, but were not.See In re Varat Enters., Inc., 81 F.3d at 1315.
B.
The doctrine of res judicata only acts to bar those claims that were adjudicated or could have been adjudicated at the time of the Sale Order; it does not bar Counts II and VI, which alleged facts occurring after October 11, 1996. Count VI alleged unjust enrichment in the Seaboard transaction. The elements of "unjust enrichment" are:
(1) a benefit conferred upon the defendant by the plaintiff; (2) an appreciation or knowledge by the defendant of the benefit; and (3) the acceptance or retention by the defendant of the benefit under such circumstances as to make it inequitable for the defendant to retain the benefit without payment of its value.Klein v. Fidelity Deposit Co., 700 A.2d 262, 277 (Md. Ct. Spec. App. 1997). Martin Marietta alleges that RGI benefited by receiving $670,000 more from Seaboard to assume the obligations under Seaboard's bonds than the $5.5 million minimum required by the APA.
Martin Marietta has failed to state a claim for unjust enrichment in Count VI of the complaint. Any benefit RGI received in the Seaboard transaction was not conferred by Martin Marietta or any other creditor. See Crosby v. Crosby, 769 F. Supp. 197, 201 (D. Md. 1991) (recognizing lack of authority to support unjust enrichment claim on theory of indirect benefit). Further, to the extent RGI received any benefit in the Seaboard transaction, it is entirely equitable for RGI to retain it. The APA called for a minimum payment from Seaboard of $5.5 million as a condition precedent to closing. Bryn Awel's creditors did not object to that figure. That RGI and Seaboard, through an independent transaction, determined that the appropriate payment to relieve Seaboard of future liability was in excess of $5.5 million did not affect Bryn Awel's creditors in the slightest. Indeed, it would have been Seaboard and RGI's failure to reach agreement which would have prevented closing and detrimentally affected Bryn Awel's creditors, including Martin Marietta.
In Count III of its complaint, Martin Marietta asserted a third-party beneficiary claim against RGI, alleging that RGI has realized accounts receivable recovery which it has not applied to the Threshold formula in violation of the APA. When two parties enter into a contract with the intent to confer a direct benefit on a third party, a duty is created that allows the intended third party beneficiary to sue on the contract where contractual privity is otherwise lacking. See Shofer v. Stuart Hack Co., 723 A.2d 481, 487 (Md.Ct.Spec.App. 1999). "For a third party beneficiary claim to succeed, the plaintiff must be a part of the class of persons specifically intended to be beneficiaries of the defendant's undertaking." Id. The determination of whether contracting parties intended the plaintiff to be a beneficiary is made based on the terms of the contract considered in light of the surrounding circumstances. See In re Merry-Go-Around Enters., Inc., 218 B.R. 298, 366 (Bankr. D. Md. 1998).
Here, section 2.2(d) of the APA sets forth the Threshold formula whereby unsecured creditors, of which Martin Marietta is undisputably one, are to be paid seventy-five percent of Bryn Awel's accounts receivable collected by RGI in excess of $10.6 million up to fifty cents on the dollar. In the context of a Sale order in Bankruptcy Court, this clause is clearly intended to benefit Bryn Awel's unsecured creditors. Indeed, it establishes the formula whereby they may collect on Bryn Awel's debt to them.
RGI cites section 13.10 of the APA, which expressly states that the APA is not intended to confer third-party beneficiary rights on non parties, in support of its contention that Martin Marietta cannot be a third party beneficiary because the contracting parties did not intend to benefit any third parties. Section 13.10 is in obvious conflict with section 2.2(d), which provides a clear intended benefit to unsecured creditors. Where two clauses of a contract are in conflict, the more specific clause will take precedence over the more general clause. See Macke Laundry Serv. Ltd. v. Alleco, Inc., 743 F. Supp. 382, 386 (D. Md. 1989); Federal Ins. Co. v. Allstate Ins. Co., 341 A.2d 399, 407 (Md. 1975). Accordingly, the specific Threshold formula in section 2.2(d) will take precedence over the blanket discharge of third-party beneficiary liability in section 13.10. Accordingly, the Bankruptcy Court erred in holding that Martin Marietta failed to state a third-party beneficiary claim.
An order effecting the rulings made in this memorandum is being entered herewith.
Because Martin Marietta's negligent misrepresentation claim (Count VIII) relates to statements made during the October 11, 1996 hearing in furtherance of counts the dismissal of which I am affirming, I will affirm the Bankruptcy Court's dismissal of Count VIII as well.
ORDER
For the reasons stated in the accompanying memorandum, it is on this 8th day of September, 1999,Ordered that:
1. The judgment of the Bankruptcy Court with respect to Counts III, IV, V, VI, and VIII is affirmed;
2. The judgment of the Bankruptcy Court with respect to Count II is reversed; and
3. The case is remanded to the United States Bankruptcy Court for the District of Maryland for further proceedings consistent with this opinion.