Charles R. Goldstein, Chapter 7 Tr. for the Estate of Universal Mktg., Inc. v. Soc'y (In re Universal Mktg., Inc.)

541 B.R. 259

In re : Universal Marketing, Inc., Debtor.Charles R. Goldstein, Chapter 7 Trustee for the Estate of Universal Marketing, Inc., Plaintiff, v. Wilmington Savings Fund Society, FSB, Defendant.

Bky. No. 09–15404 ELF

Adv. No. 11–512

United States Bankruptcy Court, E.D. Pennsylvania.

Signed November 24, 2015

Aris J. Karalis, Robert W. Seitzer, Maschmeyer Karalis P.C., Philadelphia, PA, for Debtor.

OPINION

ERIC L. FRANK, CHIEF U.S. BANKRUPTCY JUDGE

I. INTRODUCTION

II. FACTS

A. General Structure of the Universal Network

B. The Formation of the UDI–WSFS Relationship

C. The Lending Relationship

1. the Business Loan Agreement

2. the Note

3. the Guaranty

D. The Banking Relationship (Cash Management Services Agreement)

E. The Demise of the UDI–WSFS Relationship

1. WSFS' suspicions arise

2. WSFS' discovery of and response to the “Red Notice”

3. effect of the PND

III. PROCEDURAL HISTORY

A. Main Case

B. Adversary Proceeding

IV. SUMMARY JUDGMENT STANDARD

V. WSFS IS ENTITLED TO SUMMARY JUDGMENT ON THE TRUSTEE'S CONTRACT CLAIMS (COUNTS ONE AND TWO)

A. Threshold Issue: the Relationship between the Loan and the CMA

1. contract interpretation

2. integration

3. the Loan and the CMA each were only partially integrated

B. Trustee's Claim for Breach of Express Contract Provisions (COUNT TWO)

1. WSFS Non–Performance under the CMA was excused by UDI's material breach of the Loan

2. WSFS did not commit a breach of contract by failing to give prior notice before exercising its remedies under the Loan Documents

C. Implied Covenant of Good Faith and Fair Dealing (COUNT ONE)

VI. WSFS IS ENTITLED TO SUMMARY JUDGMENT ON THE TRUSTEE'S CLAIM UNDER 6 Del. C. § 4A (COUNT THREE)

A. 6 Del. C. Article 4A–305

B. The CMA

C. Discussion

VII. WSFS IS ENTITLED TO SUMMARY JUDGMENT ON THE TRUSTEE'S FRAUDULENT TRANSFER CLAIMS (COUNTS SIX AND SEVEN)

A. The Trustee's Claims Are Based Solely on Constructive Fraud

B. Summary of the Parties' Positions

C. Constructive Fraud: Applicable Legal Principles

1. 11 U.S.C. § 548

2. 11 U.S.C. § 544(b) and 6 Del. C. §§ 1304, 1305

D. WSFS Was Not an “Initial Transferee” of the UMI Transfers

1. the Bonded Financial Services and Incomnet Tests

2. WSFS was not the initial transferee because it lacked dominion and control over the UDI accounts

E. WSFS Is Not Liable as a Subsequent Transferee of the UMI–UDI Transfer

VIII. WSFS IS NOT ENTITLED TO SUMMARY JUDGMENT ON THE TRUSTEE'S SETOFF CLAIM UNDER 11 U.S.C. § 553(b) (COUNT EIGHT)

A. The Trustee's § 553(b) Claim is Dependent on the Nunc Pro Tunc Extension of Substantive Consolidation to WSFS

B. Substantive Consolidation: General Legal Principles

C. Owens Corning Does Not Bar, As a Matter of Law, the Nunc Pro Tunc Extension of Substantive Consolidation to WSFS

D. The Setoff Claim is Not Ripe for Summary Judgment

IX. MANNER OF DISPOSITION OF THE MOTIONS

A. Jurisdictional Overview

B. All of the Claims to be Dismissed are Either Non–Core or Stern Claims

C. The Limited Nature of this Court's Order Resolving the Cross–Motions

X. CONCLUSION

I. INTRODUCTION

In July 2009, Universal Marketing, Inc. (“the Debtor” or “UMI”) was one (1) of more than seventy (70) entities in a vertically integrated business (“the Universal Network”). The Universal Network operated approximately thirty-six (36) gas stations in the Northeast and Mid–Atlantic regions of the United States and also distributed gasoline to unaffiliated gas stations.

On July 23, 2009, UMI commenced this chapter 11 bankruptcy case. UMI was the only Universal Network entity that filed a bankruptcy petition. The reorganization phase of the case was short-lived; the case was converted to chapter 7 on August 18, 2009.

Eight (8) months after the conversion of the case, on April 19, 2010, Charles R. Goldstein, the chapter 7 trustee (“the Trustee”) filed a motion seeking substantive consolidation of UMI's estate with the estates of certain other Universal Network entities, including Universal Delaware, Inc. (“UDI”). Wilmington Savings Fund Society (“WSFS”), a bank that provided both commercial credit and cash management services to UDI, contested the Trustee's motion for substantive consolidation.

On August 4, 2010, with the consent of all parties, the court entered an order resolving the substantive consolidation issue. The August 4, 2010 Order largely granted the substantive consolidation relief sought by the Trustee. However, the substantive consolidation order excepted WSFS from certain aspects of the Order, in ways to be discussed in more detail below.

* * * * * *

In this adversary proceeding, the Trustee seeks to recover money from WSFS based on a variety of claims which may be grouped into three (3) legal categories.

First, the Trustee raises what the parties have referred to as “common law” claims, seeking to impose liability for breach of contract. The Trustee asserts that a “post no debits” policy WSFS implemented as to UDI's bank accounts for a few days in July 2009 breached the UDI–WSFS contract and triggered a “chain-reaction liquidity crisis”¹ throughout the entire Universal Network that “singlehandedly sentenced [the] Universal [Network] ... to [its] financial death.”²

Second, based largely on the same events giving rise to his common law claims, the Trustee asserts a statutory claim under 6 Del. C. § 4A.

Third, the Trustee asserts traditional bankruptcy transfer avoidance legal theories (preference, fraudulent transfers) under 11 U.S.C. §§ 544, 547, 548, 550, 553(b), analysis of which is more complex due to the substantive consolidation issues also present in the proceeding.

In response, WSFS maintains that the Trustee's common law claims are based on a gross exaggeration or mischaracterization of the undisputed facts. WSFS contends, quite simply, that it did nothing more than exercise ordinary and proper, garden-variety contractual remedies against UDI after UDI breached its contractual duties to WSFS in various ways (including fraudulently inducing WSFS to enter into the banking and lending relationship with UDI in the first place). WSFS also asserts that no avoidable transfers occurred.

* * * * * *

Presently before the court are the parties' cross-motions for partial summary judgment on the issue of liability.

As explained in Part IX.B., infra, all of the claims at issue are either (1) non-core claims, which require transmission of proposed findings of fact and conclusions of law to the district court absent consent of the parties, see 28 U.S.C. § 157(c)(1), or (2) core claims, for which the bankruptcy court lacks constitutional authority to enter a final judgment (again, absent consent of the parties), see Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). In both its Answer to the Second Amended Complaint and its main brief on summary judgment, WSFS unequivocally declined to consent to the entry of a final judgment by the bankruptcy court. Cf. Wellness Int'l Network, Ltd. v. Sharif, ––– U.S. ––––, 135 S.Ct. 1932, 191 L.Ed.2d 911 (2015) (parties may consent to entry of judgment by bankruptcy court). Therefore, I cannot enter a final judgment for either party in this adversary proceeding.

For the reasons stated below, I conclude that WSFS is entitled to summary judgment on all but one (1) of the Trustee's claims, there being one (1) claim in which there are disputed issues of material fact, and that the Trustee is not entitled to summary judgment on any of his claims. In light of the court's constitutional inability to enter a final order, I will enter an order that dismisses the Trustee's claims (save one) for purposes of trial of this adversary proceeding in the bankruptcy court. At the conclusion of the proceedings in this court, I will issue a comprehensive Report and Recommendation to the district court for the entry of an appropriate order with respect to all claims as to which the bankruptcy court lacks authority to enter a final judgment.

II. FACTS

A. General Structure of the Universal Network

The Universal Network was a vertically integrated business involved in the purchase of gasoline and its resale to both Universal entities and to unrelated, third-party businesses. Generally, each of the Universal Network gas stations was owned or leased by a single purpose entity (“SPE”). Within the Universal Network, UMI served as the entity that purchased gasoline from major oil companies and then resold the gasoline to the SPE's and the unrelated third parties. UDI, acted as the management company for UMI and the SPE's.³ Daniel Singh (f/k/a Daminder Batra) (“Singh”) was the principal of UDI and many, if not all, of the other Universal Network entities.

In 2009, UMI and UDI each had separate banking relationships—UMI with TD Bank and UDI with WSFS. Other Universal Network entities had banking relationships with other institutions, such as Wachovia Bank, Citizens Bank, The Bancorp Bank and PNC Bank, N.A.

The cash needs of the various entities were met by numerous inter-company money transfers, often in the magnitude of hundreds of thousands of dollars on a daily basis.⁴

By July 2009, the banking relationships that UMI and UDI had with TD Bank and WSFS, respectively, soured. That month, within a few days of each other, TD Bank locked down UMI's bank accounts and WSFS took similar action against UDI (restricting temporarily, in a manner described in more detail below, outgoing transfers from UDI's accounts).⁵

The dispute before me centers on UDI's and WSFS' lending and cash management relationships.

B. The Formation of the UDI–WSFS Relationship

UDI and WSFS first connected in November 2008, when Singh inquired about WSFS' loan and banking services. (Ex. W–29, WSFS 02026).⁶ Following several meetings between Singh and various WSFS representatives, WSFS made a presentation to Singh for cash management services. (Ex. W–30, WSFS 02019). In exchange, Singh provided the “company's financials.” (Id.). William Foley (“Foley”), WSFS' Vice President and Relationship Manager, considered the financial reports “quite strong.” (Id.). Singh ultimately requested a $5...