Hardwick Clothes, Inc. v. Jahn (In re HC Liquidation, Inc.), 1:13-bk-16079-SDR

In re: HC LIQUIDATION, INC., Debtor,

HARDWICK CLOTHES, INC., Plaintiff, v. RICHARD P. JAHN, JR., TRUSTEE, Defendant.

No. 1:13-bk-16079-SDR

Adversary Proceeding No. 1:18-ap-1005-SDR

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF TENNESSEE

June 12, 2018

Chapter 7

Appearances for the Plaintiff

Jerrold D. Farinash

Farinash & Stofan

100 West MLK Blvd., Ste. 816

Chattanooga, TN 37402

Appearances for the Defendant

James A. Fields

Samples, Jennings, Ray & Clem, PLLC

130 Jordan Dr.

Chattanooga, TN 37421

MEMORANDUM OPINION

I. Procedural History

On January 18, 2018, Hardwick Clothes, Inc. ("Plaintiff" or "Hardwick") filed a complaint in this adversary proceeding against Richard P. Jahn, Jr., Chapter 7 Trustee of the debtor's bankruptcy estate ("Trustee" or "Defendant"). [Doc. No. 1, Complaint].¹ The controversy between the parties stems from an asset purchase agreement ("APA") and bill of sale (together the "agreement") entered into between the Plaintiff and the debtor, HC Liquidation, Inc. This court approved the sale on June 6, 2014. [Id. at 1]. The Plaintiff seeks a declaratory judgment by the court that certain assets were sold pursuant to the terms of the agreement. [Id. at 1-3]. The Plaintiff has identified $376,082.91 in "disputed property," which it alleges the Trustee has exercised control over in contravention of the agreement. [Id. at 3].

The Trustee filed an answer on February 16, 2018. [Doc. No. 6]. In his answer, the Trustee does not contest the terms of the APA and bill of sale as stated in the complaint. [Id. at 1-3]. However, he argues that the terms are subject to a different interpretation than that put forth by the Plaintiff. [Id.]. The Trustee contends that the parties to the agreement did not intend for the disputed property to be included in the sale of assets and that he has properly exercisedcontrol over them. [Id.]. The Trustee also raises the affirmative defenses of estoppel, failure of consideration, and laches. [Id. at 4].

On February 26, 2018, the Plaintiff filed a motion for partial judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c) or, in the alternative, for partial summary judgment pursuant to Federal Rule of Civil Procedure 56(a). [Doc. No. 9]. The Plaintiff's motion seeks a declaratory judgment "that all of the assets of the Debtor, except certain Excluded Assets, were sold to Hardwick Clothes, Inc., via a Bill of Sale signed June 16, 2014." [Id. at 5]. In its accompanying memorandum, the Plaintiff contends that the terms of the APA and bill of sale outlined in the complaint, unambiguously reflect that "all assets" of the debtor other than utility deposits were sold to the Plaintiff. [Doc. No. 10, at 6]. Accordingly, the Plaintiff argues that the disputed property falls within the contractual description of "all assets" and that the Trustee, therefore, has improperly exercised control over the disputed property. In seeking only a partial judgment, the Plaintiff asks that the court reserve ruling on any issues related to: (1) what assets were in existence on June 16, 2014; and (2) the reasonable and necessary costs and expenses incurred by the Trustee in collecting and preserving the disputed assets. [Doc. No. 9, at 5].

The Trustee filed a motion to defer consideration of the Plaintiff's motion pending the close of discovery. [Doc. No. 12]. The Trustee essentially argued that because he was not a party to the agreement, he would need time to conduct discovery regarding whether the parties intended to convey the disputed property and what actions were taken by the Plaintiff in relation to the disputed property after the closing of the sale. [Doc. No. 12, at 6]. In an order and memorandum opinion entered April 23, 2018, the court granted in part and denied in part the Trustee's motion. [Doc. No. 18]. Specifically, the court deferred consideration of the Plaintiff'smotion for partial summary judgment but found that it was not appropriate to defer consideration of the Plaintiff's motion for partial judgment on the pleadings. The court provided leave for the Trustee to file a response to the Plaintiff's motion for partial judgment on the pleadings, and the Trustee filed an objection to the Plaintiff's motion on May 7, 2018.

The Plaintiff's motion for partial judgment on the pleadings is now ripe for the court's consideration. For the reasons explained below, the court concludes that the Plaintiff's motion should be denied. To the extent that the Trustee's objection seeks judgment on the pleadings in his favor, the court concludes that such a request also should be denied for the same reasons.

II. Jurisdiction

28 U.S.C. §§ 157 and 1334, as well as the general order of reference entered in this district, provide this court with jurisdiction to hear and decide this adversary proceeding. The parties agree that the Plaintiff's action is a core proceeding and consent to this court's entry of judgment. [Doc. No. 1, at 1; Doc. No. 6, at 1]; see 28 U.S.C. §§ 157(b)(2)(A) and (b)(2)(O).

III. Factual Allegations

Hardwick is the successor in interest to Jones CapitalCorp, LLC. [Doc. No. 1, at ¶ 3]. As the successor in interest of Jones CapitalCorp, LLC, Hardwick purchased assets of the debtor pursuant to an APA approved by order of this court entered on June 6, 2014. [Id.]. A bill of sale was executed to consummate the transfer on June 16, 2014.² [Id. at ¶ 13]. The Plaintiff contends that it purchased "all" of the assets of the debtor. [Id. at ¶ 3]. The Trustee denies this allegation, contending in his answer that the Plaintiff purchased "substantially all" of the assets with the specific exclusion of certain assets. [Doc. No. 6, at ¶ 3].

In its complaint, the Plaintiff identifies several assets, which it terms "disputed property," over which it alleges that the Trustee has improperly exercised control. [Doc. No. 1, at ¶ 9]. These assets are identified in the complaint as:

Blue Cross Blue Shield

$41,543.35

State of Tennessee Worker's Compensation Bond

$176,300.00

Tax refund

$7,150.00

Michigan 2014 Tax refund

$700.00

12/2013 941 refund

$19.69

2013 940 Tax refund

$369.87

[Id.]. Additionally, the Plaintiff alleges that the Trustee exercised control over the remainder of a State of Tennessee Worker's Compensation bond in the amount of $150,000, which is held as a certificate of deposit ("CD") at First Tennessee Bank. [Id. at ¶ 10]. The Plaintiff seeks a declaratory judgment that this disputed property, totaling $376,082.91, is the Plaintiff's property and requests that the court order the Trustee to return the property to the Plaintiff. [Id. at 4-5].

The Trustee admits that he has collected the funds that the Plaintiff identifies as disputed property with some exceptions and clarifications. [Doc. No. 6, at ¶¶ 9-10]. First, the Trustee contends that the amount of the 12/2013 941 refund was in fact $17.69, not $19.69. [Id. at ¶ 9]. Second, the Trustee states that "there was never a 'Worker's Compensation Bond' to collect, as alleged." [Id.]. Rather, the Trustee admits that he has "collected $176,300 from reductions in the Debtor's deposited funds at First Tennessee Bank." [Id.]. Third, the Trustee admits that he holds a CD in the amount of $150,000 at First Tennessee Bank but notes that it is pledged to the State of Tennessee. [Id. at ¶ 10]. Finally, he denies the Plaintiff's characterization of these assets, other than the First Tennessee CD, as "disputed property" because he contends that they involve "post-closing transactions." [Id.].

The Plaintiff's claim to the disputed property is based on the contractual language of the APA and bill of sale. In his answer, the Trustee does not dispute the terms of the agreement as stated in the complaint and set out below, but disputes the Plaintiff's interpretation of the contractual language. [Id. at ¶¶ 4, 5, 6, 7, 12, 13].

As alleged in the complaint, the APA contains the following language in Paragraph 1.02(b) defining "Assets":

"Assets" shall mean, collectively, all of the Debtor's assets of any nature whatsoever, real, personal or mixed, known or unknown including, but not limited to the fee interest in the Land and Improvements, Accounts Receivable, Equipment, Inventory, Supplies, Intellectual Property, all of Seller's memorabilia, historical artifacts, historic samples, historic clothing, archives, relics, keepsakes, souvenirs, pictures, books, accounting records, newspaper articles, Intangible Personal Property, Records, Assumed Contracts, pre-paid assets, refunds, unclaimed funds, customer and other deposits, including utility deposits, and other intangible and tangible assets, whether real, personal, or mixed, which are located upon the Land or owned and held for the use by Seller in connection with the Business but excluding the Excluded Assets in all cases.

[Doc. No. 1, at ¶ 4 (emphasis original to complaint); Doc. No. 1-4, at 7].

Paragraph 1.02(h) of the APA defines which assets were excluded from the sale:

"Excluded Assets" shall mean those items mutually identified and agreed to by the Parties hereto in writing, IF ANY, as provided in Section 2.05 of this Agreement.

[Doc. No. 1, at ¶ 5 (emphasis original to complaint); Doc. No. 1-4, at 8].

Section 2.05 of the APA covers "Excluded Assets" and provides as follows:

Excluded Assets. In entering into this Agreement, Purchaser shall not acquire, as a result of the Transaction set forth herein, any interest in any of the Excluded Assets, such Excluded Assets described more particularly on Exhibit 2.05 to this Agreement, including without limitation the rights relating to certain utility deposits set forth on Exhibit 2.05, and specifically disclaims any interests whatsoever therein. Subsequent to the Effective Date of this Agreement until the Closing, Purchaser and Seller may mutually agree to amend, modify, or supplement such exhibit.

[Doc. No. 1, at ¶ 6 (emphasis original to complaint); Doc. No. 1-4, at 12]. The complaint alleges that any assets that were to be excluded...