IN RE:
UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
LEXINGTON
IN RE:
CALUMET FARM, INC. CASE
NO. 91-51414
VS. ADVERSARY
NO. 01-5147
CENTRAL BANK & TRUST
COMPANY DEFENDANT
This
matter is pending on cross-motions for summary judgment of the plaintiff,
Firelight Investments Corporation, and the defendant, Central Bank and Trust
Company.
FINDINGS OF FACT:
The court adopts the findings of fact set out in its
Memorandum Opinion of March 13, 2002, as follows:
Firelight’s
complaint, which was filed March 23, 2001 in the Fayette Circuit Court, Civil
Action No. 2001-CI-1116, seeks enforcement of a subordination agreement. The agreement was executed September 27,
1988 by Second National Bank and Trust Company, Lexington, Kentucky as Trustee
of the Warren Wright, Jr. Trust. At the
time of execution of the agreement Calumet Farm, Inc. (hereinafter “Calumet
Farm” or “debtor”) was indebted to the trust in the amount of $13,187,500,
evidenced by two notes, plus accrued interest.
To induce First City National Bank Houston, Texas to loan monies from
time to time with or without security to Calumet Farm, the trust subordinated
the indebtedness owed to it by Calumet Farm to indebtedness the debtor was in
the process of incurring to First City National Bank, which indebtedness was
evidenced by a line of credit note for $50,000,000 and a term note for
$15,000,000. See Subordination
Agreement.
Warren
Wright, Jr., the son of the founder of Calumet Farm, predeceased his mother,
Lucille Wright Markey, who held a life estate in the farm under the will of
Warren Wright, Sr. Following the death
of Lucille Wright Markey in 1982 the farm was incorporated and the owners were
issued stock evidencing their interest in the farm. As a result of incorporation the Warren Wright, Jr. trust owned
an approximately 62.5% interest in the farm.
Bertha Wright, the widow of Warren Wright, Jr. is the life beneficiary
of the trust. The four children of Warren
Wright, Jr. and Bertha Wright, Lucille, Courtney, Warren III, and Tom Wright
were issued stock evidencing their pro rata ownership of the remaining 37.5%
interest in the farm.
Calumet
Farm, Inc. filed a petition for relief under chapter 11 of the Bankruptcy Code
in this court on July 11, 1991.
Since
commencement of the bankruptcy proceeding there has been a transformation of
the parties referred to in the Subordination Agreement.
The
debtor in possession, formerly known as Calumet Farm, changed its name to
Phoenix Corporation. Apparently this
was to accommodate the fact the name Calumet Farm was sold as an asset along
with the farm in order that the purchaser might continue to race thoroughbred
horses under the name Calumet Farm.
Second
National Bank and Trust Company, the trustee of the Warren Wright, Jr. Trust,
merged with Bank of Commerce and became Commerce National Bank. The merged bank was acquired by National
City Bank.
During
the course of administration of the Warren Wright, Jr. Trust certain officers
of these banks served on the board of directors of Calumet Farm, Inc.,
representing the interest of the trust in the farm.
The
creditors’ committee in the Calumet Farm, Inc. bankruptcy case was granted
leave of court to file an action against the officers and directors of Calumet
Farm, including the bank officers who had served on the debtor’s board of
directors, for, inter alia, alleged breach of their fiduciary duty. This action was filed by the committee in
the U.S. District Court. Case No.
93-291. The action was settled with
respect to National City Bank by payment of a substantial sum to the bankruptcy
estate.
On
November 1, 1994 the Probate Division of the Fayette Circuit court appointed
Central Bank and Trust Company as Successor Trustee of the Warren Wright, Jr.
Trust. The bank qualified as trustee on
December 1, 1994. Thus, Central Bank
and Trust Company is named defendant in the present action to enforce the
subordination agreement executed by the trust in 1988 in favor of First City
National Bank, Houston, Texas.
On
October 30, 1992 First City National Bank, Houston, Texas was closed by the
Comptroller of the Currency and the Federal Deposit Insurance Corporation,
FDIC, was appointed receiver. On the
same date the FDIC, as receiver, conveyed certain assets of the closed bank,
including the notes and other documentation evidencing the indebtedness of
Calumet Farm to the bank, to New First City National Association, a bridge
bank. On February 13, 1993 the
Comptroller of the Currency closed New First City National Association and
appointed the FDIC as receiver. On the
same date the FDIC as receiver conveyed the assets of New First City to Texas
Commerce Bank, N.A. Thereby, Texas
Commerce Bank became the owner of a claim against Calumet Farm, Inc. in the
prepetition amount of $32,392,565.46, evidenced by the proof of claim in that amount
filed by First City National Bank, Houston, Texas on January 2, 1992, Claim No.
54.
Thereafter, Texas Commerce Bank, N.A. transferred to
First City Liquidating Trust Loans, LP, the loans it had acquired from New
First City National Association. First
City Liquidating Trust Loans, LP thereupon became the owner of Claim No. 54.
On August 23, 1995 the debtor in possession and First
City Liquidating Trust Loans, LP entered into a settlement agreement whereby
Claim No. 54 was allowed as a secured claim in the amount of $7,851,506.19 and
as an unsecured claim in the amount of $10,372,150.41 (Document No. 1539). The court approved this settlement agreement
by order entered on September 1, 1995.
The secured portion of this claim is not in issue, apparently having
been satisfied by proceeds realized from the sale of thoroughbred horses and
from proceeds of stud fees in which First City National Bank, Houston, Texas
held security interests.[1]
On May 3, 1999 First City Liquidating Trust Loans, LP
assigned the $10,372,150.41 unsecured portion of Claim No. 54 to Vigilant
Insurance Company. This was after Frank
Cihak, an officer of First City National Bank, Houston, Texas had been
convicted in federal court of criminal charges in connection with loans made by
the bank to Calumet Farm. This
assignment may have been made in connection with settlement on a claim under an
insurance policy issued by Vigilant insuring First City National Bank, Houston
against loss due to misconduct of banks officers and employees. As hereinafter noted, Vigilant was the owner
of this $10,372,150.41 unsecured claim when an order was entered confirming the
debtor’s Liquidating Plan of Reorganization.
Early in the Calumet Farm chapter 11 bankruptcy case
Second National Bank and Trust Company, the original Trustee of the Warren
Wright, Jr. Trust, filed a claim in behalf of the trust. The claim was filed as a secured claim in
the amount of $502,361.11 and as an unsecured claim in the amount of
$23,417,609.65. See Proof of
Claim No. 33 filed November 18, 1991 in the total amount of $23,919,970.76.
On November 15, 1995 the Warren Wright Jr. Trust amended
its claim to reduce the amount of the claim to $23,847,470.76.
On March 29, 1999 the debtor in possession and the Warren
Wright, Jr. Trust filed a joint motion for approval of a compromise agreement
whereby the claim of the trust would be allowed as an unsecured claim in the
amount of $7,500,000 and the remainder of the claim in the amount of
$16,347,470.76 would be subordinated as equity (Docket #2006). This joint motion was approved by order of
the court entered June 21, 1999 (Docket No. 2026).
On April 13, 2000 the debtor filed a Disclosure Statement
and a Liquidating Plan of Reorganization (Docket #2070). On April 14, 2000 the debtor filed an
amendment to the Disclosure Statement (Docket #2072).
A hearing on approval of the Disclosure Statement was
noticed for May 8, 2000 (Docket #2071).
On May 9, 2000 the court approved the debtor’s Disclosure
Statement, as amended, subject to further amendment as agreed upon at the May 8
hearing.
On May 10, 2000, the debtor filed a First Amended
Disclosure Statement.
A hearing on confirmation of the plan was noticed for
June 12, 2000. However, on June 5, 2000
an order was entered rescheduling the confirmation hearing for June 26, 2000
(Docket #2103).
On June 6, 2000 Donald and Nancy Puckett and Michael
Sweeney, creditors, had filed objections to confirmation of the plan (Docket
#2103).
On June 27, 2000 an agreed order was entered resolving
the objection of the Pucketts and Sweeney to confirmation of the plan (Docket
#2118). On the same date an order was
entered confirming the plan.
At the time of confirmation of the plan the
$10,372,150.41 unsecured claim, the surviving amount of Claim No. 54 originally
filed by the defunct First city National Bank of Houston, Texas was owned by
Vigilant Insurance Company.
On August 24, 2000 the disbursing agent paid a dividend
of $1,551,300.07 on Claim No. 54 to Vigilant Insurance Company and a dividend
of $1,121,729.83 to Central Bank and Trust Company as Trustee of the Warren
Wright, Jr. Trust. The latter dividend
was paid on the $7,500,000 unsecured amount of Claim No. 33 as compromised by
the claimant and the debtor in possession.
Vigilant Insurance Company did not object to confirmation
of the plan which proposed payment of a dividend on the claim of the Warren
Wright Jr. Trust as a Class 4 unsecured claimant along with other claimants in
that class, including Vigilant.
Vigilant did not raise an issue about or seek enforcement of the
subordination agreement executed by the trust in favor of First City National Bank of Houston, the
original owner and filer of Claim No. 54.[2]
On February 1, 2001 Firelight Investments Corp., a
Delaware corporation, filed notice and documentation of the assignment and
transfer of Claim No. 54 to Firelight by Vigilant Insurance Company for a
consideration of $100,000.
On March 23, 2001 Firelight commenced the present action
in the Fayette Circuit Court against Central Bank and Trust Company to enforce
the subordination agreement executed in 1988 by the Warren Wright, Jr. Trust in
favor of First City National Bank of Houston. The objective of Firelight’s action is to recover the
$1,121,729.83 dividend paid on the claim of the Warren Wright, Jr. Trust, and
to be adjudged entitled to receive any future dividends that may be paid on the
claim, a result that would follow from enforcement of the subordination
agreement.
A further, albeit much smaller dividend, is contemplated
on Class 4 unsecured claims pending the resolution of three outstanding
controversies, only one of which involves the possible recovery of additional
monies for the bankruptcy estate.
Pursuant to Article XI of the debtor’s plan the court
retained jurisdiction “to determine any and all claims objections” and “to
determine all controversies, suits, and disputes that may arise in connection
with the interpretation, enforcement or consummation of the Plan.”
Paragraph 5 of the Subordination Agreement of September
27, 1988, which is attached as an exhibit to Firelight’s complaint, is as
follows:
5.
In the event of any receivership, insolvency, bankruptcy, assignment for
the benefit of creditors, reorganization or arrangement with creditors,
adjustment of debt, whether or not pursuant to bankruptcy laws, the sale of all
or substantially all of the assets, dissolution, liquidation, or any other
marshalling of the assets and liabilities of Borrower, the Subordinated
Creditor will at Lender’s request file any claim, proof of claim, proof of
interest or other instrument of similar character necessary to enforce the
obligations of Borrower in respect of the Subordinated Debt and will hold in
trust for Lender and pay over to Lender, in the form received (together with
any necessary endorsement), to be applied on the Superior Indebtedness, any and
all monies, dividends or other assets received in any such proceedings on account of the Subordinated Debt unless and until
the Superior Indebtedness shall be paid in full. In the event that the Subordinated Creditor shall fail to take
any such action requested by Lender, Lender may, as attorney-in-fact for the
Subordinated Creditor, take such action on behalf of the Subordinated Creditor,
and the Subordinated Creditor hereby appoints Lender as attorney-in-fact for
the Subordinated Creditor to demand, sue for, collect and receive any and all
such monies, dividends or other assets and give acquittance therefor and to
file any claim, proof of claim, proof of interest or other instrument of
similar character and to take such other proceedings in Lender’s own name or in
the name of the Subordinated Creditor as Lender may deem necessary or advisable
for the enforcement of this Subordination Agreement. The Subordinated Creditor will execute and deliver to Lender such
other and further powers of attorney or other instruments as Lender may request
in order to accomplish the foregoing.
CONCLUSIONS OF LAW:
In Browning v. Levy, 283 F.3rd 761 (6th
Cir., 2002), the Court of Appeals for this circuit ruled that an order of the
bankruptcy court confirming a chapter 11 plan has the effect of a final
judgment of the district court and is res judicata with respect to any issue
raised or that could have been raised in the confirmation proceeding, citing In
re Chattanooga Wholesale Antiques, Inc., 930 F.2d 458, 463 (6th
Cir., 1991).
Firelight contends, based on the language of paragraph 5
of the Subordination Agreement of September 27, 1988, that its cause of action
against Central Bank and Trust Company, as successor trustee of the Warren
Wright, Jr. Trust, did not arise until Central Bank received the $1,121,729.93
dividend on claim no. 33, and failed to account for and turn over the dividend
to Firelight, as successor in interest to First City National Bank of Houston,
as required by paragraph 5 of the Subordination Agreement. Firelight argues therefore that its claim
against Central Bank and Trust Company could not have been litigated in the
confirmation proceedings because the distribution of the dividend to Central
Bank and Trust Company, as trustee of the Warren Wright, Jr. Trust occurred
after confirmation of the plan.
This argument overlooks the
applicability of Title 11 U.S.C. §502(b)(1), as follows:
(b)
Except as provided in
subsections (e)(2), (f), (g), (h) and (i) of this section, if such objection to
a claim is made, the court, after notice and a hearing, shall determine the
amount of such claim as of the date of the filing of the petition, and shall
allow such claim in lawful currency of the United States in such amount, except
to the extent that –
(1)
such claim is
unenforceable against the
debtor and property of the debtor, under any
agreement or applicable law for a reason other than
because such claim is contingent or unmatured;
…
Under this provision
of the Bankruptcy Code, the filing of the petition accelerates contingent and
unmatured claims. Such claims are
provable and allowable except for unmatured interest. Allowance of contingent and unmatured claims is permitted in
order that such claims may be dischargeable in bankruptcy. The argument that Vigilant, Firelight’s
predecessor in interest, could not have asserted its claim against Central Bank
and Trust Company under the Subordination Agreement during the confirmation
proceedings because its subrogation claim was contingent or unmatured is simply
fallacious.
Vigilant
Insurance Company could have laid claim “against the debtor and property of the
debtor” for the money on hand in the bankruptcy estate awaiting distribution to Central Bank and
Trust Company prior to or during the confirmation proceedings. 11 U.S.C. §
510(a).
The
other elements barring a claim on grounds of res judicata (1) a final decision
on the merits by a court of competent jurisdiction; (2) a subsequent action
between the same parties or their successors in interest, and (3) an identity
of the cause of action, are obviously present in this matter.
The
court is of the opinion Central Bank and Trust Company is entitled to summary
judgment dismissing Firelight’s complaint on the grounds the relief sought is
barred by principles of res judicata.
Dated
this 10th day of January 2003
By
the Court –
_______________________________
JOE
LEE, U.S. BANKRUPTCY JUDGE
Copies to:
Gregory R. Schaaf, Esq.
Brian M. Johnson, Esq.
David L. Bohannon, Esq.
Kevin G. Henry, Esq.
Elizabeth Thompson, Esq.
UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
LEXINGTON
IN
RE:
CALUMET
FARM, INC. CASE
NO. 91-51414
DEBTOR
FIRELIGHT
INVESTMENTS CORPORATION PLAINTIFF
VS. ADVERSARY
NO. 01-5147
CENTRAL
BANK & TRUST COMPANY DEFENDANT
In accordance with the Memorandum Opinion of the court this day entered the complaint of the plaintiff, Firelight Investments Corporation, should be and hereby is DISMISSED.
There
being no just cause for delay this is a final and appealable judgment.
Dated
this 10th day of January 2003
By
the court –
___________________________________
JOE
LEE, U.S. BANKRUPTCY JUDGE
Copies to:
Gregory R. Schaaf, Esq.
Brian M. Johnson, Esq.
David L. Bohannon, Esq.
Kevin G. Henry, Esq.
Elizabeth Thompson, Esq.
[1] The Settlement Agreement excluded from its coverage
claims of First City Liquidating Trust Loans, LP against third parties liable
on the indebtedness. In view of the
obvious applicability of title 11 U.S.C. § 502(b)(1)
the court finds it unnecessary to determine whether the Settlement Agreement
nullified the Subordination Agreement.
[2] The
predecessors in interest of Vigilant did not object to the compromise between
the debtor in possession and the Warren Wright, Jr. Trust whereby the major
portion of the claim of the trust was subordinated to equity. The plan gave notice of subordination of the
claim.