Onkyo Europe Electronics GMBH v. Global Technovations Inc. (In re Global Technovations Inc.)

694 F.3d 705

In re GLOBAL TECHNOVATIONS INCORPORATED; Onkyo America Incorporated, Debtors.Onkyo Europe Electronics GMBH; Onkyo Malaysia SDN BHD; Onkyo Corporation, Appellants,

v.Global Technovations Incorporated, Appellee.

No. 11–1582.

United States Court of Appeals, Sixth Circuit.

Argued: May 31, 2012.

Decided and Filed: Sept. 13, 2012.

Recognized as Unconstitutional

28 U.S.C.A. § 157(b)(2)(C)

ARGUED:Michael R. Limrick, Bingham McHale LLP, Indianapolis, Indiana, for Appellants. Glenn M. Kurtz, White & Case LLP, New York, New York, for Appellee. Jeffrey A. Clair, United States Department of Justice, Washington, D.C., for Amicus Curiae. ON BRIEF:Michael R. Limrick, John F. McCauley, Bingham McHale LLP, Indianapolis, Indiana, for Appellants. Glenn M. Kurtz, White & Case LLP, New York, New York, Charles C. Kline, Jason R. Domark, White & Case LLP, Miami, Florida, for Appellee. Sarang V. Damle, United States Department of Justice, Washington, D.C., for Amicus Curiae.

Before: BOGGS, NORRIS, and KETHLEDGE, Circuit Judges.

OPINION

BOGGS, Circuit Judge.

Global Technovations Incorporated (“GTI”) went bankrupt after it purchased Onkyo America Incorporated (“OAI”), a subsidiary of Onkyo Corporation (“Onkyo”). GTI had purchased OAI for $13 million in cash and $12 million in three-year promissory notes. Onkyo attempted to recover the remainder of the purchase price from GTI's bankruptcy estate by filing a proof of claim for $12 million. GTI responded by suing Onkyo under the theory that the OAI purchase was a fraudulent, voidable transaction. The bankruptcy court agreed. The court found that OAI was worth $6.9 million at the time of the transaction, not $25 million. As a result,the court voided GTI's obligation to pay the remainder of the purchase price. It also ordered Onkyo to repay GTI $6.1 million—the difference between the $13 million GTI had paid and the $6.9 million the bankruptcy court determined that OAI was worth.

The United States District Court for the Eastern District of Michigan affirmed the bankruptcy court's decision. After wrestling with a debate about the extent of the bankruptcy court's jurisdiction to order relief, we also affirm.

I

A

OAI, an Indiana-based supplier of car-stereo equipment, was a subsidiary of Onkyo and two of its other subsidiaries, Onkyo Europe and Onkyo Malaysia. In the late 1990's, Onkyo began trying to sell OAI. Onkyo's chairman and CEO, Naoto Otsuki, wanted to take Onkyo public and selling OAI would allow Onkyo to realize a gain, which in turn would allow it to utilize a tax-loss carryforward languishing on its books.

Onkyo management approached GTI about buying OAI because the companies had done business before. Onkyo told GTI that OAI had strong cash flows and generated approximately $6.9 million in revenue per year.

GTI needed cash—its primary investor no longer wanted to invest with the company and it was not generating sufficient revenue. GTI was in danger of being delisted by the American Stock Exchange, a consequence it wished to avoid. Therefore, GTI expressed interest when Onkyo approached it about purchasing OAI.

Because OAI was a private company and no public information was available, GTI relied on the assertions made by Onkyo management, specifically, president Shinobu Shimojima and CFO Doug Pillow, during negotiations and due diligence. GTI relied on OAI's projection that as of August 31, 2000, the month of the sale, OAI's trailing–12–month earnings before interest, taxes, depreciation and amortization (EBITDA) would be $6.8 million. However, as time passed, the numbers actually earned came in below what OAI had projected. As a result, the price of the acquisition was lowered and it was difficult for the parties to secure financing.

Once financing was secured, third-party due diligence was performed by Deloitte & Touche. Deloitte & Touche reported that it believed OAI would remain solvent, but it conditioned this conclusion on the accuracy and completeness of the information given by OAI's management, stating that it had taken no independent steps to verify the information provided by OAI's management. Deloitte & Touche also evaluated cost-saving measures touted to GTI by OAI; however, Deloitte & Touche did not analyze the feasibility of these measures—they “assumed the proposed cost saving measures were viable, and confirmed the mathematical accuracy of the projected impact of the cost savings on OAI's financial statements.”

On August 23, 2000, Onkyo and GTI executed an amended Share Purchase Agreement, a contract for sale. In exchange for all 569,000 shares of OAI's common stock, which was owned by Onkyo Europe, Onkyo Malaysia, and Onkyo Japan, GTI agreed to pay $13 million in cash and to provide a $12 million obligation, payable in August 2003. The obligation took the form of three promissory notes—one to Onkyo Europe, one to Onkyo Malaysia, and one to Onkyo Japan, each in proportion to their ownership of OAI.

After the purchase, GTI made several unpleasant discoveries about OAI's financialhealth. First, accounting errors and adjustments reduced OAI's trailing–12–month EBITDA figure by 29%. Of the $1.3 million OAI's management projected would be earned in July and August, only $475,000 was actually achieved. The court agreed with GTI's expert witness that “the existence and severity of this miss [in earnings] would have become apparent to OAI's management in the course of their day-to-day liquidity analysis ... [and] establishes that the Onkyo Defendants either knew or should have known about this significant and material performance miss before the closing of the acquisition. But they failed to disclose the anticipated miss to GTI.” Another error was a roughly $650,000 double counting of inventory. Pillow, OAI's CFO, knew about the double counting, but he chose not to disclose it to GTI.

Second, GTI discovered that the cost-saving measures projected by OAI's management—$2.7 million annually—were dramatically overstated. Neither OAI management nor Deloitte & Touche analyzed the feasibility of these measures to ascertain their true value. After the acquisition, it became apparent that most of the savings were based on projections from measures that were not viable.

Third, OAI's sales forecasts were not met. For example, OAI had projected a $5.1 million increase in sales revenues for 2000, even though it had not met its prior, lower, sales goals. An OAI sales manager had written to the OAI's president to inform him that the sales forecasts were “unreasonable and unattainable.” The increase in sales failed to materialize.

Finally, GTI discovered that OAI's management had undisclosed conflicts of interest during the acquisition. Pillow, OAI's CFO, was offered a one-time payment of $100,000 by Onkyo's management, if and only if OAI was sold to GTI. Pillow was paid $100,000 after the acquisition. Also undisclosed was the fact that OAI's president, Shimojima, owned 300,000 shares of stock in Onkyo, and stood to benefit if Onkyo improved its books and went public. Shimojima was also an active member of Onkyo's board of directors.

Sixteen months after the acquisition, on December 18, 2001, GTI filed a voluntary petition for bankruptcy under Chapter 11. The next day, OAI, now wholly owned by GTI, did the same.

An entity's act of filing a petition for bankruptcy operates as a “stay” of actions that could have been filed against the entity to recover claims. 11 U.S.C.A. § 362(a). Similarly, once a petition is filed, judgments cannot be enforced against the debtor, the debtor's property cannot be repossessed or foreclosed on, and liens cannot be perfected or enforced against the debtor's property. Ibid. Therefore, once GTI filed for bankruptcy, Onkyo was unable to recover the $12 million obligation that GTI still owed for OAI.

However, Onkyo petitioned the bankruptcy court to allow it to recover the $12 million. Onkyo filed proofs of claim in the bankruptcy court, requesting that the court lift the stay. A bankruptcy court can lift the stay for cause, after notice and a hearing, if a party requests. 11 U.S.C.A. § 362(d)(1).

GTI then filed the instant suit in the bankruptcy court.

B

1. The Bankruptcy Court Proceeding

On July 14, 2010, GTI filed a suit in bankruptcy court. GTI sought to avoid the $12 million obligation that it incurred and recover the $13 million payment it made to Onkyo when it purchased OAI, on the basis that the sale was a fraudulent transfer. Second, and relatedly, GTI asked that the bankruptcy court disallow the proofs of claim that Onkyo filed in the bankruptcy court, as they were based on the allegedly fraudulent transfer.

Chapter 11 allows a bankruptcy trustee to avoid any transfer (excepting certain charitable contributions) participated in by the debtor that is “voidable under applicable law by a creditor holding an unsecured claim that is allowable under [11 U.S.C.] § 502.” 11 U.S.C. § 544(b)(2). Therefore, a trustee can avoid a transfer if a hypothetical unsecured creditor of the debtor could void it under an applicable law. GTI claimed that an unsecured creditor could void both its payment of $13 million and its obligation of $12 million under the Florida Uniform Fraudulent Transfer Act, Fla. Stat. § 726.101 et seq. The Florida Uniform Fraudulent Transfer Act was “applicable law” under the bankruptcy code because GTI had its principal place of business in Florida.¹

The Florida Uniform Fraudulent Transfer Act provides, in relevant part:

A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.

Fla. Stat. § 726.106(1). To prove that the obligation incurred by GTI to Onkyo was...