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Ceda Mills, Inc v. Ceda Mills

March 29, 2012

CEDA MILLS, INC., APPELLANT,
V CHET DUFFY, MICHAEL SIEGEL, ROBERT BRUCE, ALBERT GABRIEL, AND ROSE BYERS, APPELLEES.
CHET DUFFY, APPELLANT,
v.
CEDA MILLS, INC., MICHAEL SIEGEL, ROBERT BRUCE, ALBERT GABRIEL, ROSE BYERS AND THE OFFICE OF THE U.S. TRUSTEE, APPELLEES.



The opinion of the court was delivered by: McVerry, J.

MEMORANDUM OPINION AND ORDER OF COURT

Pending before the Court are two appeals from the April 13, 2010 order of the Bankruptcy Court, one filed by Debtor/Appellant Ceda Mills, Inc. ("Ceda Mills") at civil action number 2:10-cv-599, and the second filed by Debtor's majority shareholder, Chester ("Chet") Duffy, at civil action number 2:10-cv-796. Ceda Mills filed a comprehensive brief in support of its position. Document No. 4 at Civ.A.No. 2:10-cv-599 ("Ceda Mills Doc. No."). Appellant Duffy never filed a brief in support of his appeal. See Docket at Civ.A.No. 2:10-cv-796 ("Duffy Doc."). On September 8, 2010, this Court dismissed both appeals as untimely. Appellant Ceda Mills and Appellant Duffy each appealed their respective dismissals to the Court of Appeals for the Third Circuit, which vacated this Court's dismissals and remanded the appeals for consideration on the merits. Ceda Mills Doc. No. 10 & Duffy Doc. No 7. The appeals are now ripe for disposition. Generally speaking, the Order of the Bankruptcy Court from which both Appellants appeal was part of the bankruptcy proceeding at Case No. 04-24452-JAD, and ordered, inter alia, Appellant Ceda Mills to remit to three of its minority shareholders their respective pro rata shares of surplus funds realized in the bankruptcy proceeding following the liquidation of the company. Having considered the Appellants' positions with regard to the April 13, 2010 Order of the Bankruptcy Court, the Court will dismiss the appeals.

Bankruptcy Rule 8013 provides that the district court "may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings." Fed. R. Bankr. P. 8013. Bankruptcy Rule 8002 provides that notice of appeal must be filed within fourteen days "of the date of the entry of judgment, order, or decree appealed from." Fed. R. Bankr. P. 8002(a). On appeal from an order of the Bankruptcy Court, the district court must apply the clearly erroneous test to factual findings and de novo review to questions of law. In re Trans World Airlines, Inc., 145 F.3d 124, 131 (3d Cir.1998); Fed. R. Bankr.P. 8013.

Appellant Ceda Mills appeals the order of the Bankruptcy Court on the following two grounds:

1. Whether the Bankruptcy Court erred in exercising jurisdiction over a Post-Confirmation Debtor in matters unrelated to the consummation of the Debtor's Plan of Reorganization?

2. Whether the Bankruptcy Court erred in permitting the rescission of agreements between the Debtor and its shareholders, which were valid and enforceable on their face under State Law without holding an evidentiary hearing?

See Ceda Mills Doc. No. 4. Likewise, Appellant Duffy raised the same two issues on appeal, albeit in slightly different terms, as well as the issue of whether the Bankruptcy Court exceeded its post confirmation jurisdiction in compelling the Debtor to engage in a dissolution notwithstanding the provisions of a confirmed plan which contemplated that the debtor would continue in business. Duffy Doc. No. 1 at exh. 45; see also, Doc. No. 600 at Bankruptcy Case No. 04-24452-JAD ("Bankr. Doc. No. 600"). While the parties are familiar with the general background of this case, a review of the factual and procedural history of the bankruptcy proceeding itself is appropriate given the nature of this most recent appeal and the underlying orders of the Bankruptcy Court.

Background

Appellant Ceda Mills, Inc. was a company engaged in processing metals at a plant in New Castle, Pennsylvania. The president of Ceda Mills, Appellant Duffy, owns an 83% equity position in the company, while four other shareholders own the remaining 17%. In July and August 2003, severe storms damaged Appellant's plant and machinery, forcing the cessation of operations. On April 2, 2004, Appellant filed a voluntary petition for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code, in the United States Bankruptcy Court for the Western District of Pennsylvania at case No. 04-24452. Appellant's most significant asset was a lawsuit, also pursued in Bankruptcy Court, against its insurance carrier for property damage, business interruption, and bad faith denial of coverage. Forty-one (41) creditors filed proofs of claim against Appellant between May 3, 2005, and April 21, 2006. The original Disclosure Statement was filed by Appellant on November 1, 2004 contemporaneous with the Chapter 11 Plan of Reorganization. After an unsuccessful attempt at plan confirmation, Appellant filed an Amended Plan of Reorganization ("Amended Plan") and an Amended Disclosure Statement on April 20, 2005. Among other things, the Amended Plan included the following provisions:

Execution of the Plan

Funding for this Plan will be derived from insurance proceeds and from the ongoing business operations of the Debtor. The Debtor believes that ongoing operations will be sufficient to fund the Debtor's Plan. In addition, with an operational plant, the Debtor will likely be able to to obtain investments from third parties and financing which would produce additional funds to support the Debtor's Plan obligations. If the Debtor is unsuccessful in its litigation against its insurance carrier, the Plan will require liquidation of the Debtor's assets and it is unlikely that anyone except administrative claimants and some secured claimants would receive payment. ...

Retention of Jurisdiction

The Court will retain jurisdiction of the Chapter 11 Case for the following purposes:

a. To determine the allowance or disallowance of claims and interest(s).

b. To fix the allowances of compensation and other administrative expenses.

c. To determine any and all applications, objections, adversary proceedings and contested or litigated matter properly before the Court and pending on the Effective Date.

d. To modify the Plan or remedy any defect or omission or reconcile any inconsistency in the Order of Confirmation to the extent authorized by the Code.

e. To enforce provisions of the Plan relating to payments and distributions to be made to the claimants.

f. For such other matters as may be set forth in the Order of Confirmation or Post-Confirmation Order.

See Amended Plan, Bankr. Doc. No. 115. By way of an order entered by the Bankruptcy Court, the Amended Disclosure Statement was conditionally approved, and a confirmation hearing was scheduled on the Amended Plan. After a hearing on the Amended Disclosure Statement and the Amended Plan, the Bankruptcy Court confirmed Appellant's Amended Plan on June 23, 2005. A Post-Confirmation Order was issued by the Bankruptcy Court on June 24, 2005.

A. Insurance Litigation and Liquidation

During this time, there were two adversary proceedings pursued by Debtor/Appellant

Ceda Mills in Bankruptcy Court against its insurance carrier. On June 28, 2004, Ceda Mills commenced an adversary proceeding against Cincinnati Insurance Company (its insurance carrier), Gilbert's Insurance Agency, Inc., and James B. Schneider, at Adversary Proceeding No. 04-2773-JAD for, inter alia, breach of contract, conspiracy to breach contract, and bad faith denial of coverage. Ceda Mills commenced a second adversary proceeding on August 5, 2005 against Cincinnati Insurance Company, PNK United Inc., Tennis Roofing and Asphalt, Inc., and Glen Flex Roofing Systems, at Adversary Proceeding No. 05-2919-JAD for, inter alia, property damage, business interruption, and bad faith denial of coverage. This insurance litigation was protracted and ultimately took over two years to get to trial. While the litigation was pending, Appellant Ceda Mills lacked sufficient funds to adequately protect secured creditor interests as required by 11 U.S.C. § 361. As a result, the liquidation alternative set forth in the Amended Plan was invoked by Ceda Mills prior to trial, and the company moved to sell substantially all of its tangible assets before the Bankruptcy Court. See Bankr. Doc. No. 192. Following a hearing on the motion to sell its real and personal property, the Bankruptcy Court granted the request of Ceda Mills and approved the sale of Debtor's property on July 19, 2006. Bankr. Doc. No. 211.

The adversary proceedings ultimately resulted in a settlement between the parties on or about October 31, 2006. As the result of the settlement, Appellant Ceda Mills obtained enough funds to pay all of its creditors the full amount of their allowed claims. The amount of funds realized by Appellant Ceda Mills in this case was at least $15,106,191.42, most of which ($14,100,000.00) was derived from a confidential settlement funded by the defendant insurance carriers at Adversary Proceeding No. 04-2773-JAD. The insurance settlement was described as confidential because, at the request of the insurance defendants and with the consent of Appellant Ceda Mills, the global settlement was approved under seal. As the Bankruptcy Court later discovered, apparently no notice was provided to Appellant's creditors or, more importantly to this appeal, to its minority shareholders about the receipt of funds as part of the settlement.*fn1

This appeal requires a review of the sequence, nature, and timing of Appellant's various filings and the Bankruptcy Court's orders since the final insurance settlement on October 31, 2006.

B. Rule to Show Cause: Payments to Creditors

Upon final approval of the settlement, the Bankruptcy Court expected Appellant Ceda

Mills to pay all creditors holding allowed claims in full at the time of the consummation of the settlement, and, to the extent claims were timely disputed, place proceeds in a reserve to fund immediate payment when the subject dispute was finalized. The insurance settlement agreement signed by Appellant acknowledged that the proceeds of the insurance settlement were to be used to pay the creditor claims. See Mutual Release and Settlement Agreement at p. 18 (¶ V.F.)("Ceda Mills and Duffys agree to undertake any and all actions necessary to satisfy the bankruptcy estate and/or the claims of all creditors currently pending in the action styled In re: Ceda Mills, Inc., Bankruptcy No. 04-24452BM, Chapter 11 (United States District Court for the Western District of Pennsylvania).")

Thereafter, numerous transactions came to the attention of the Bankruptcy Court that caused concern, and the Court issued a Rule to Show Cause on June 12, 2008. Bankr. Doc. No. 336. The transactions in question included the fact that, following the consummation of the insurance settlement, Appellant Ceda Mills, along with Appellant Duffy, negotiated a significant number of creditors down from their filed claims, even though almost all of the creditor's claims were never timely objected to and were deemed allowed as a matter of bankruptcy law. See Bankr. Doc. No. 369 at 9 - 10; see also Bankr. Doc. No. 336. Apparently, following the insurance settlement, Debtor compromised a number of allowed claims at steep discounts (exceeding $558,000 in aggregate) in exchange for immediate payment. Id. at Appendix A; see also, Bankr. Doc. No. 345, Response of Ceda Mills to Rule, at p. 11 (Debtor "determined to explore the possibility that creditors might be willing to compromise their claim amounts in exchange for expedited (immediate) payment.") and at p. 16 (" ... offers for immediate payment ... in exchange for a discount in the claim amount.")

The Bankruptcy Court held hearings on the Rule on July 22, 2008, August 29, 2008, and September 5, 2008. On September 19, 2008, the Bankruptcy Court ordered the following:

1. The settlements referenced in the Rule by and between the debtor and creditors holding allowed claims are deemed to be non-final due to the fact that Ceda Mills, Inc. and its principal settled such claims with non-public insider information. That non-public insider information is that the debtor had more than sufficient funds to pay such creditor claims in full. The Court will therefore issue that an [sic] order and notice to creditors in the form attached hereto at Exhibit "A", which advises allowed claimants that Ceda Mills, Inc. has, and always had, sufficient funds on hand to pay allowed claims in full and provide those creditors with an opportunity to revisit their settlements in light of the true facts of this case.

Bankr. Doc. No. 360. Appellant moved for reconsideration of this Order on September 29, 2008, Bankr. Doc. No. 362, and a hearing was held on the motion of October 21, 2008 where the Bankruptcy Court took the matter under advisement. See Bankr. Doc. No. 364. With the Memorandum Opinion and Order filed on November 14, 2008, the Bankruptcy Court provided the following determinations in this regard:

It appears to the Court that the settlements of creditor claims were obtained all while the debtor and its insider had an uneven level of information regarding the outcome of this bankruptcy case. This is unfortunate because when the Court sealed the insurance settlement, the Court did not expect that Ceda Mills would utilize the Court's order to obtain a unilateral benefit over unknowing creditors. Utilizing the sealed record as a sword is a sharp practice which this Court does not accept. Not only is such conduct a sharp practice, it is also conduct that is inequitable, and is inconsistent with the duties imposed upon Ceda Mills, its counsel, and Mr. Duffy under applicable law. See In re Insulfoams, [184 B.R. 694, 702 (Bankr. W.D. Pa. 1995), aff'd 104 F.3d 547 (3d Cir. 1997)](holding that a reorganized debtor is a fiduciary of the interests of creditors); Virzi v. Grand Trunk Warehouse and Cold Storage Co., 571 F.Supp. 507, 512 (E.D. Mich. 1983)(holding that counsel's failure to disclose material facts with hopes of inducing settlement violated duty of candor and fairness imposed on members of the bar); In re Bidermann Industries, U.S.A., 203 B.R. 547, 551 (Bankr. S.D.N.Y. 1997)("actions of chief executive officer of the company are imbued with fiduciary duties as well"); see also, Pepper v. Litton, 308 U.S. 295, 311 (1939)("he who is in such a fiduciary position cannot serve himself first and his cestui second. He cannot manipulate the affairs of his corporation to their detriment and in disregard of the standards of common decency and honesty."); In re Allegheny Int'l, Inc., 134 B.R. 814, 820 (Bankr. W.D. Pa. 1991)("A fiduciary's dealings with those it represents are subject to rigorous scrutiny. Where any of its transactions are challenged, the burden is on the fiduciary not only to prove the good faith of the challenged transaction but also to show its inherent fairness from the viewpoint of those that the fiduciary represents." (quoting In re Mesta Mach. Co., 67 B.R. 151 (Bankr. W.D. Pa. 1986)).

Bankr. Doc. No. 369 at pp. 18 - 19. While the issue regarding the claim settlements with creditors are not the subject of the two appeals pending in the matters sub judice, it is referenced here because it provides a degree of context to the Bankruptcy Court's dealings with the parties, and the capacity of Appellant Ceda Mills to both manipulate and inequitably exploit knowledge, or lack thereof, for the purpose of the economic benefit of the majority shareholder (and his family members) at the apparent expense of both the creditors and the minority shareholders.

C. Rule to Show Cause: Inside Transfers to Duffy and Notice to Minority Shareholders The Rule to Show Cause, and the proceedings that followed, were not limited to the issue

of the settlement of claims held by creditors. The Bankruptcy Court also expressed concern with what appeared to be insider transfers by majority shareholder Duffy for his own benefit and for the benefit of his relatives, and the question "of why should these insiders receive preferential treatment to the detriment of both arms-length creditors and the non-Duffy equity holders of Ceda Mills". Bankr. Doc. No. 336. More specifically, Appellant Ceda Mills, through majority shareholder Duffy, made hundreds of thousands of dollars of payments to Duffy and his relatives (collectively, the "transfers"), while making no distributions to the minority shareholders following the consummation of the settlement. These transfers were made despite the fact that the record indicates that the recipients had not filed any claims against Ceda Mills, and were not identified as recipients of any distribution under the Plan of Reorganization ahead of the other shareholders. See, e.g., Claims Register at Bankr. Case No. 04-24454-JAD; see also, Bankr. Doc. No. 18, Petition and Schedules at Schedules D, E, and F. The questioned transfers included $400,000.00 of payments to Duffy's wife, Michelle Duffy; a loan repayment of $2,000.00 to Duffy's son, Mike Duffy; and various "loan [payments] against Duffy home" along with payments on account of other similar personal obligations of the Duffys which equal at least $94,376.64. See Bankr. Doc. No. 321.

Following the Show Cause hearing conducted on July 22, 2008, Appellant Ceda Mills filed a letter with the Bankruptcy Court on August 5, 2008, with an attached proposed letter to the equity holders purportedly updating the minority shareholders with the status of the bankruptcy and the insurance litigation. Bankr. Doc. No. 348. The Show Cause hearing continued on August 29, 2008, the Bankruptcy Court rejected Appellant Ceda Mills' proposed letter and found it to be misleading, including a specific reference to a "net loss to date" of $3,771,280.86, which the Bankruptcy Court found to be entirely inaccurate. See Bankr. Doc. No. 359, Transcript of hearing held on August 29, 2008. Appellant Ceda Mills presented no other evidence at that hearing, and the Bankruptcy Court took the matter under advisement. Id.

On September 19, 2008, the Bankruptcy Court ordered the following:

2. Because Mr. Chester Duffy and his relatives have no pre-petition allowed claims and no allowed post-petition administrative expense claims, all payments to, or for the benefit of, Mr. Duffy and his relatives during the pendency of this case are therefore deemed to be distribution(s) on account of Mr. Duffy's equity interest in Ceda Mills. Under these circumstances, and given the fact that Ceda Mills, Inc. has liquidated its assets, the equity holders should be provided with an opportunity to be paid their ratable share of the surplus funds recovered in this case.

3. Ceda Mills, Inc. is therefore ordered to account to shareholders, the Court and the Office of the U.S. Trustee for Ceda Mills' receipts and disbursements; and provide shareholders with an opportunity to redeem their equity interests. Such accounting and proposed distribution shall be by way of a First Report and Account in a form that substantially complies with the form annexed hereto at Exhibit "B." Said First Report and Account shall be typed in its entirety and shall be filed by Ceda Mills, Inc. within ten (10) days of the date of this Order.

4. Shareholders are parties in interest, entitled to be served with notice of these proceedings. 11 U.S.C. § 1109. The shareholders have had no meaningful notice of these proceedings. As a result, the confidential nature of the insurance settlement found at Adversary proceeding No. 04-2773-JAD is hereby relaxed to provide shareholders of Ceda Mills, Inc. complete access with the insurance settlement and the record of this case; provided however, absent an order of court providing otherwise, the shareholders of Ceda Mills, Inc. are ordered to not disclose and keep the terms and conditions of the insurance settlement confidential as provided in the settlement documents.

5. Within ten (10) days of the date of this Order, Ceda Mills, Inc. shall update its mailing matrix to add (a) any new addresses of creditors, and (b) the addresses of all equity holders of Ceda Mills, Inc.

Bankr. Doc. No. 360. Instead of filing its First Report and Account within ten days, Appellant Ceda Mills moved for reconsideration of the September 19, 2008 Order. Bankr. Doc. No. 362. In relevant ...


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