Opinion
03-CV-371 (DRH)(ETB)
November 24, 2003
Randolph E. White, Robert L. Pryor and A. Scott Mandelup, PRYOR MANDELUP, L.L.P., Westbury, New York for Committee of Unsecured Creditors of Interstate Cigar Co., Inc.;
Richard G. Haddad, OTTERBOURG, STEINDLER, HOUSTON ROSEN, P.C., New York, New York for Appellant Congress Financial Corporation
MEMORANDUM OF DECISION AND ORDER
Congress Financial Corporation ("Congress") appeals from several decisions by United States Bankruptcy Judge Dorothy Eisenberg. For the reasons that follow, Congress's appeal is denied and Judge Eisenberg's orders are affirmed.
BACKGROUND
The complete factual and procedural history of this case are set forth in Judge Eisenberg's decisions, familiarity with which is presumed. Thus, only the facts and law necessary to determine the instant disposition are stated here.Interstate Cigar Co., Inc. ("Cigar") operated a number of businesses, including a health and beauty aids distribution company and a chain of retail drug stores. Cigar's operations were financed by a working capital loan from CIT/Group/Factoring Manufacturers Hanover ("CIT"). On March 7, 1990, Cigar entered into an Asset Purchase Agreement to sell substantially all the assets of its health and beauty aids division ("transferred assets") to Interstate Distribution, Inc. ("EDI"), for an agreed-upon price of $29,154,924.00. As of that date Cigar owed CIT, its secured creditor, approximately $21,658,238.43. CIT agreed to release its security interest in the assets transferred to IDI in consideration of a cash payment of $18,250,238.43. Cigar executed a promissory note to CIT for the balance of the monies owed.
Congress financed IDI's acquisition by wiring the agreed sum directly to CIT on behalf of IDI as consideration for CIT's release of its security interest in the transferred assets. Cigar did not give notice to its creditors regarding this transfer of assets pursuant to the Bulk Sales Law, Article 6 of the New York Uniform Commercial Code ("Bulk Sales Law"). In documents executed contemporaneously with this asset transfer, Congress agreed to indemnify IDI in the event of litigation arising out of this asset transfer. As a result, Congress acquired a security interest in the transferred assets.
On May 10, 1990, an involuntary petition was filed against Cigar under Chapter 7 of the Bankruptcy Code. The liquidation of Cigar's estate was placed into the hands of the Committee of Unsecured Creditors ("Committee") and its counsel. In September 1990, the Committee commenced an action in the United States Bankruptcy Court, before Judge Eisenberg, against IDI and Congress.
A parallel action was commenced in state court on the issue of whether Congress violated the Bulk Sales Law by not giving notice of the transferred assets sale. Judge Eisenberg abstained from deciding the federal bankruptcy action until the state court proceeding was resolved. The state court determined that the creditors were entitled to notice of the sale, thus Congress violated the Bulk Sales Law. Comm. of Unsecured Creditors of Interstate v. Interstate Distrib., Inc., 710 N.Y.S.2d 858 (N.Y.Sup.Ct. 2000). The Appellate Division, Second Department, affirmed this decision. Comm. of Unsecured Creditors of Interstate v. Interstate Distrib., Inc., 736 N.Y.S.2d 384 (2nd Dep't 2002). The New York Court of Appeals denied Congress's leave application. Comm. of Unsecured Creditors of Interstate v. Interstate Distrib., Inc., 782 N.E.2d 566 (N.Y. 2002).
The Committee then moved for summary judgment on liability and damages based on the state court determination. In a decision dated May 16, 2002, Judge Eisenberg held that: (1) Plaintiff, pursuant to 11 U.S.C. § 544(b), was "entitled to a judgment in the amount of the value of the Transferred Assets covered by the Bulk Sales Law"; (2) "The Bulk Sales Law is limited on its face to recovery of inventory and equipment transferred in violation thereof, and the damages awarded to the Plaintiff shall be limited to those components"; (3) "The inventory and equipment transferred to IDI were given an aggregate value of $14,976,662.00 pursuant to the Purchase Agreement, which provides the appropriate basis for valuation of same for purposes of fixing damages;" (4) "Congress has failed to introduce any material issues of fact which would preclude this Court from making such findings pursuant to the Plaintiffs motion for summary judgment"; and (5) Plaintiff was entitled to an award of prejudgment interest. In re Interstate Cigar Co., Inc., No. 890-81248-478 (Bankr. E.D.N.Y. May 16, 2002). On June 21, 2002, Judge Eisenberg granted summary judgment in favor of the Committee.
On August 23, 2002, Judge Eisenberg ordered judgment in favor of the Committee for the principal sum of $14,976,66.00, with prejudgment interest, assessed at the New York state rate of 9% per annum, in the amount of $16,126,789.14, for a total judgment amount of $31,103,454.14. Congress filed a motion for reconsideration, which Judge Eisenberg denied on November 25, 2002.
Congress raises the following arguments in this appeal: (1) Judge Eisenberg erred by denying Congress relief under Bankruptcy Code Section 550(e); (2) Judge Eisenberg erred in valuing the transferred assets at the full value of the inventory and equipment; (3) Judge Eisenberg erroneously denied Congress its right of subrogation to CIT's security interest; (4) Judge Eisenberg erred in awarding prejudgment interest and by applying the interest rate under New York law, rather than the federal law; and (5) the Committee lacked standing to pursue the Bulk Sale claims against Congress.
DISCUSSION
A district court hearing an appeal from a Bankruptcy Court reviews that court's findings of fact under the "clearly erroneous" standard, see Fed.R.Bankr. 8013, while its conclusions of law are reviewed under the de novo standard. See In re Arochem Corp., 176 F.3d 610, 620 (2d Cir. 1999); In re Bennett Funding Group, Inc., 146 F.3d 136, 138 (2d Cir. 1998); See also In re Forges, 44 F.3d 159, 162 (2d Cir. 1995). 1. Denial of Relief Under Bankruptcy Code Section 550(e)
Congress argues that Judge Eisenberg erred in her decision which held that Congress was not entitled to a credit against the $14.9 million principal judgment by way of the $18.25 million it financed to obtain the release of CIT's lien, pursuant to Bankruptcy Code Section 550(e).
Section 550 provides relief for to a transferee for transfers made in "good faith" and with lack of knowledge of the subject transfer. See 11 U.S.C.A. § 550(e). Judge Eisenberg found that "Congress is disqualified from availing itself of the protections afforded under section 550(e)(1) of the Bankruptcy Code for a number of reasons," which she thoroughly explained. In re Interstate Cigar Co. Inc., No. 890-81248-478, at 9-17 (Bankr. E.D.N.Y. Nov. 25, 2002).
Judge Eisenberg's rationale was three-fold: first, she found that Congress did not qualify as a good faith transferee under the Bankruptcy Code or the Bulk Sales Law. Congress argues strenuously against this finding, claiming that Judge Eisenberg failed to distinguish between "lack of knowledge" and "good faith." Judge Eisenberg did not, however, base her decision solely on Congress's lack of good faith: "[e]ven if the Court found that Congress acted in good faith, Congress cannot rely on § 550(e)(1) to obtain a lien on the value of the inventory and equipment transferred back into the Debtor's estate because Congress did not improve the value of the property in question after the transfer took place." Id. at 14 (citing In re Sherman, 67 F.3d 1348, 1358 (8th Cir. 1995) (holding "Bank is not entitled to a lien in the amount of its pre-transfer liens under § 550 because the release of these liens occurred before, not after, the transfer")); see also § 550(e)(1).
Finally, Judge Eisenberg found that "the language of § 550(e) is limited to transactions where the property in question still exists for the trustee to recover. . . . In this case, there is no 'property' left to transfer back to the Debtor's estate. Any improvements that Congress could allege it made to the 'property' post transfer have already benefitted Congress when the value of the 'property' was liquidated for its benefit and it was repaid." In re Interstate Cigar Co., Inc., No. 890-81248-478, at 23 (Bankr. E.D.N.Y. Nov. 25, 2002). "Section 550 does not appear to be applicable when the property transferred can no longer be recovered and the trustee's remedy is the recovery of value." In re Harris, 195 B.R. 577, 584 n. 5 (Bankr. W.D.N.Y. 1995). Accordingly, the Court finds that Judge Eisenberg properly determined that Section 550 was not applicable to Congress in this case.
2. Value of Inventory and Equipment
Congress asserts that Judge Eisenberg erred in valuing the transferred assets at the full value of the inventory and equipment.
Judge Eisenberg correctly held that "the proper measure of damages is the book value of the assets as of the date of the transfer, not an amount based on the value the transferee actually received for disposal of the assets in question at some later date or some other valuation." Id. at 19 (citations omitted); see In re Coated Sales, Inc., 144 B.R. 663, 668 (Bankr. S.D.N.Y., 1992) ("[A] company's assets must be valued at the time of the alleged transfer and not at what they turned out to be worth at some time after the bankruptcy intervened."). Congress has not provided the Court with facts or law which contravene Judge Eisenberg's findings and rationale on this point. Thus, the Court denies Congress's appeal regarding the value of inventory and equipment.
3. Prejudgment Interest
Congress contends that Judge Eisenberg erred in awarding prejudgment interest and by applying the interest rate under New York law rather than the federal law.
Judge Eisenberg correctly determined that a prejudgment interest award was appropriate to compensate Committee "for the loss of use of money that [it] would have enjoyed had the transaction not have taken place." In re Interstate Cigar Co., Inc., No. 890-81248-478, at 29 (Bankr. E.D.N.Y. May 16, 2002). Judge Eisenberg carefully considered the relevant factors as stated in Wickham Contracting Co., v. Local Union No. 3, Intern. Broth. of Elec. Workers, AFL-CIO, 955 F.2d 831, 834 (2d Cir. 1992). Having reviewed Judge Eisenberg's decision on this point, the Court finds that she properly awarded prejudgment interest.
Congress also argues that Judge Eisenberg should have set the interest rate according to federal law, 28 U.S.C. § 1961, not the New York Civil Practice Law and Rules Section 5001(a). Judge Eisenberg properly held that "where the cause of action itself has its genesis in state law, the proper interest rate to apply when calculating prejudgment interest is the relevant state law." In re Interstate Cigar Co., Inc., No. 890-81248-478, at 3 (Bankr. E.D.N.Y. July 26, 2002) (citing cases). As explained in In re Stephen Douglas, Ltd., 174 B.R. 16, 22 (Bankr. E.D.N.Y. 1994, where "the judgments are predicated on New York substantive law . . . prejudgment interest will be allowed from the date of the filing of the complaints . . . at the New York [interest] rate." Congress cites no law to refute this holding. Upon review of the applicable law and Judge Eisenberg's thorough analysis of this issue, the Court finds that Judge Eisenberg correctly applied the interest rate under New York law.
4. Subrogation and Standing Issues Not Preserved
"Where a bankruptcy appellant has failed to raise and preserve an objection during bankruptcy proceedings, [appellant] cannot raise it on appeal." In re Kassover, 268 B.R. 698, 702 (S.D.N.Y. 2001), aff'd sub nom., Kassover v. Gibson, 29 Fed. Appx. 747 (2d Cir. 2002) (citing In re Blackwood Associates, L.P., 153 F.3d 61, 67 (2d Cir. 1998)). In such cases, the Court will not consider an unpreserved issue unless failure to do so will result in manifest injustice. In re Lionel Corp., 29 F.3d 88, 92 (2d Cir. 1994); In re Macrose Indus. Corp., 186 B.R. 789, 802 (E.D.N.Y. 1995).
Congress did not raise the issue of standing before the Bankruptcy Court, and Judge Eisenberg did not address it in any of her decisions. Regarding the subrogation issue, Judge Eisenberg specifically states that "Congress did not make subrogation arguments in its prior papers in response to the Plaintiffs present motion for summary judgment and it is therefore not ripe for reconsideration or reargument." In re Interstate Cigar Co., Inc., No. 890-81248-478, at 23 (Bankr. E.D.N.Y. Nov. 25, 2002). Congress has not demonstrated that failure to review either of these claim will result in manifest injustice. Accordingly, the standing and subrogation issues are waived.
CONCLUSION
For the foregoing reasons, Congress's appeal is DENIED and Judge Eisenberg's decisions are AFFIRMED. The Clerk of the Court is directed to close this case.