Opinion
SUCV20180910BS1
03-30-2018
ACAS, LLC v. NEW ENGLAND CONFECTIONERY COMPANY, INC.
MEMORANDUM OF DECISION AND ORDER ON PLAINTIFF’S EMERGENCY MOTION FOR APPOINTMENT OF RECEIVER
Mitchell H. Kaplan, Justice of the Superior Court
This action arises out of plaintiff ACAS, LLC’s request that a receiver be appointed to take control over and liquidate all of the assets of defendant New England Confectionery Company, Inc. (NECCO) to aid ACAS in the recovery of NECCO’s debt to it, which, it alleges, is secured by a perfected security interest in all of NECCO’s assets. On March 21, 2018, ACAS filed both a Verified Complaint (the Complaint) and a pleading which it labeled: Request for Expedited/Emergency Hearing on Assented-To Emergency Motion for Appointment of Receiver (the Motion). On March 23, 2018, the court convened a hearing on the Motion. At the hearing, ACAS presented the court with a proposed form of order entitled: Order Appointing Receiver and Preliminary Injunction in Aid of Receivership (the proposed Order). Another party also appeared at the hearing, Americraft Carton, Inc. (Americraft). Americraft presented the court with a motion to intervene in order to oppose the appointment of a receiver. It asserted that it, too, was a creditor of NECCO and had previously filed an action against NECCO to recover the debt (Suffolk Superior Court CA No. 18-0731). It went on to state that, on March 22, 2018, it obtained a Trustee Process Attachment in the amount of $515,185.29 on any of NECCO’s credits held by Eastern Bank, as well as a preliminary injunction enjoining reach and apply defendants from making payments to NECCO in a similar amount (both issued by Ames, J.). After hearing from the parties, the court continued the matter to March 28, 2018, with leave for the parties to file additional pleadings in support of their positions. ACAS and Americraft each filed supplemental pleadings and the court heard additional argument on the Motion on March 28, 2018.
For the reasons that follow, ACAS’ Motion is denied without prejudice.
ADDITIONAL BACKGROUND
As relevant to the Motion, the Complaint alleges that NECCO is indebted to ACAS through term loans and a revolving line of credit in the aggregate sum of $102,105,563 and that, as of March 19, 2018, the debt is in default. This debt is secured by all of NECCO’s assets and the security interests were perfected by UCC-1 Financing Statements filed on February 22, 2017 and August 8, 2008.
The Complaint also alleges that NECCO is in the process of negotiating a sale to a prospective buyer, but that the amount of the sale proceeds will be significantly less than the secured indebtedness to ACAS. NECCO issued a WARN ACT notice to its employees on March 6, 2018, notifying them of their potential termination and starting the 60-day period during which they must be paid. ACAS has agreed that a receiver will pay these wages during the 60-day period.
With respect to the reason that the court should appoint a receiver, the Complaint simply states: " Emergency appointment of a receiver is necessary to provide an orderly process (a) for NECCO’s operations to be conducted for the remaining period until NECCO’s assets can be sold, and (b) for sale of NECCO’s assets to take place on such terms and in such time frame as will maximize the value to be received for the assets." No facts supporting this conclusory allegation are alleged.
The Complaint did not allege, nor did ACAS explain in either the Motion or the proposed Order, that, through a holding company, ACAS is the indirect owner of all of NECCO’s capital stock and has appointed a majority of its Board of Directors. These facts were first disclosed by Americraft and then confirmed by ACAS.
Americraft is an unsecured trade creditor of NECCO. It represented to the court that, on information and belief, at least one other NECCO creditor has filed suit against NECCO in Middlesex Superior Court, and that there are numerous other such creditors. Americraft also contends that ACAS sold, or caused the sale of, NECCO’s real estate in May 2017 for in excess of $50 million and used that sum to retire debt due it. It posits that this payment might constitute a preferential payment to an insider avoidable in bankruptcy under 11 U.S.C. § 547, if a petition is filed within a year of the transfer. ACAS responds that it, or its predecessor entity, has owned that real estate since 2007.
DISCUSSION
There exists very little appellate case law in Massachusetts describing the Superior Court’s equitable authority to appoint a non-statutory receiver to assist creditors in recovering debts from corporate defendants. In Charlette v. Charlette Brothers Foundry, Inc., 59 Mass.App.Ct. 34 (2003), a case factually very dissimilar from the pending action, in which the Appeals Court was addressing an issue of collateral estoppel, it generally explained that:
A receivership is an equitable remedy designed to protect and preserve the assets of a corporate debtor for those creditors who the court ultimately decides are entitled to them ... The appointment of a receiver is incidental to other relief requested by a plaintiff, ... because such an appointment seeks to preserve property until the court can adjudge the parties’ rights ... Because receivership seriously interferes with a defendant’s property interests, a judge should appoint a receiver only if he sees no other way to protect the plaintiff and other creditors ... Receivership is not solely for the benefit of the petitioning creditor or creditors.Id. at 45-46. (Internal quotations and citations omitted.)
The only guidance that the court has found in Massachusetts appellate case law that addresses a situation such as the one presented by this case, where the creditor with the debtor’s acquiescence asks the court to enter a " friendly" receivership, i.e., one that is supported by the debtor corporation, is New England Theatres, Inc. v. Olympia Theatres, Inc., 287 Mass. 485 (1934) (New England Theatres ). Although the Supreme Judicial Court (SJC) issued this opinion several decades ago, it appears still to be authoritative and to explain the factors that a court confronted with a request to enter a friendly receivership should weigh. The court finds it to be instructive on the issues raised by the pending Motion.
In New England Theatres, the two defendant corporations were interrelated and generally could be considered a single debtor. The plaintiff and the defendants were affiliated companies, both owned by the same entity. The defendants owed large sums of money to the plaintiff as well as other creditors, many of whom had begun to bring actions against the defendants and obtain judgments; it was anticipated that other creditors would do the same. The defendants were none the less solvent, although without enough current assets to meet their obligations in the ordinary course of business. However, if the assets were conserved and efficiently managed and the defendants continued in business, there would be sufficient assets to pay all their debts with sums left for their shareholders. The object of the plaintiff’s " bill in equity" was not to collect its indebtedness but rather to conserve the assets of the defendants. The procedure to be followed to request the court to appoint a receiver was agreed upon by the plaintiff and defendants before their " bill" was filed. All relevant facts were disclosed to the court. Many creditors were heard in connection with the proceedings which enabled the court to make the foregoing findings of fact. Only one intervening creditor/petitioner, E.M. Lowes, Inc., objected to the receivership entered by the court, and it appealed.
In its analysis, the SJC began by explaining that the " court had jurisdiction as a branch of its general chancery powers to appoint receivers of a domestic corporation for the conservation of its assets and other appropriate purposes. It was empowered to take this action at the instance of a simple contract creditor who had not reduced his claim to judgment, provided the defendants made no objection." Id. at 491. " Nevertheless, such appointment rests in sound judicial discretion to be put forth only with circumspection. It should not be exercised except in cases where otherwise there would be wasting and loss of property which ought to be made available for payment of the debts of the corporation and which cannot be conserved in any other way so satisfactorily as by the appointment of a receiver." Id.
The SJC concluded that the trial court’s factually findings were supported by the evidence. The fact that the plaintiff and the defendants were affiliated did not preclude a receivership, because the corporations were separate entities not created for deceptive purposes. Moreover, full disclosure of all relevant facts, including this relationship, was made to the trial judge. The SJC held that the following facts supported the decision to appoint a receiver:
Financial disaster appeared to be at hand. Loss of assets seemed to be inevitable. The closing of the theatres would greatly impair, if not destroy, the good will built up through years of successful operation ... The finding is that by preserving the continuous operation of the moving picture theatres of the defendants waste and loss of their assets would be prevented, their debts paid and something salvaged for the stockholders. Receivership is a recognized procedure. Cooperation among the parties chiefly interested to accomplish a proper end is not a badge of fraud ... The appointment of receivers was justified in the light of all the conditions.
The circumstance that the interveners had attachments upon the property of the defendants at the time of the appointment of the receivers gives them no superior advantage in challenging the receivership. The right to establish the validity of their liens acquired by such attachments, if any is preserved to them by a clause in the decree from which that have appealed G.L.c. 223, § § 130, 131 [still in effect today] ... One object of receivership proceedings is to secure equality of treatment among creditors so far as permissible under the law.Id. at 493-94.
In its supplemental filing to this court, ACAS attached several orders entered by Superior Court judges over the last dozen years establishing receiverships similar to that requested by ACAS. For the most part, the orders do not suggest that they were entered following contested hearings in which other creditors objected and facts were found based on evidence or affidavits supporting a conclusion that a receivership was the best means of conserving assets for all interested parties.
In particular, ACAS directed the court to an order entered by Judge van Gestel when he was presiding in the BLS 1 in 2007. See Giovanna Pasquale v. Telcom USA, Inc. et al., (Suffolk Superior Court, CA. No. 06-2667). In reviewing that order, the court noticed a significant difference between the approach taken by the plaintiff/creditor in that case and that adopted by ACAS in the instant matter. Judge van Gestel’s order begins with the following introduction: " ..., a hearing having been held on January 24, 2007 upon notice to all known creditors of Telcom; no objection the Joint Motion for Receivership having been received, other than the Limited Objection to Joint Motion for Receivership filed by Fifteen Railroad Avenue, LLC, which is addressed in a separate order; Telcom having made an assignment for the benefit of creditors ... grounds for an equitable receivership having been established; ..." In this case, ACAS proceeded by means of an emergency motion filed the very same day as the Complaint, apparently without notice to any other creditors. The moving papers do not explain what the emergency was. Indeed, the moving papers did not disclose that ACAS controlled NECCO through stock ownership and majority representation on its Board, a fact which appears to cut against the notion that an emergency existed, as the debtor corporation would not take actions wasting assets or impairing the interests of the secured creditor, if the property were not placed in the hands of an independent receiver. The moving papers also did not disclose that another Superior Court judge had issued an attachment on trustee process and reach and apply injunction just days before.
It may be that an equitable receivership is the optimal means to liquidate the assets of NECCO. The case law, however, makes clear that a court should be cautious in ordering this extraordinary relief and do so only if it protects the rights of all parties that may have provable interests in the assets of the debtor corporation. In this case, ACAS requests a receivership to aid it in maximizing the value of NECCO’s assets for its own benefit; rather than to benefit any other creditor or stakeholder in NECCO. Indeed, ACAS specifically asserts that it has a perfected first position security interest in all of NECCO’s property and the value of that property is substantially less than the debt NECCO owes it. Moreover, ACAS controls NECCO, and, therefore, ACAS does not require the assistance of the court in preventing the debtor from taking action impairing ACAS’ rights.
As explained above, a receivership proceeding is not intended only to benefit the petitioning creditor, but rather should give all creditors the opportunity to establish rights to recover all or part of their claims against the debtor, to the extent permissible at law. Id. at 494. There are, however, procedural benefits to a receivership that can make this process more efficient. For example, G.L.c. 223, § 130, attachments on the debtor’s property entered within the previous four months are dissolved, so that the legal rights of all creditors may be fairly adjudicated. Further, an independent third party purchasing the debtor’s assets may be more willing to proceed if the sale is approved by the court, eliminating any claim that ACAS caused NECCO to sell an asset for less than fair value. And, it is possible that even though, in the end, the court were to conclude that ACAS has a fully enforceable security interest in all of NECCO’s assets, a receivership may be the most efficacious way to preserve assets while other creditors are given the opportunity to contest ACAS’ position. As New England Theatres makes clear, the fact that ACAS and NECCO are affiliates does not preclude the appointment of a receiver, if that is the most efficacious way to preserve assets while allowing all parties to be heard.
Accordingly, ACAS’ emergency Motion is denied without prejudice. The court will, however, entertain a motion to appoint a receiver on an expedited basis provided that notice of that motion is provided to all of NECCO’s creditors. At the hearing on that motion, the court will anticipate that ACAS will support its allegation that the " appointment of a receiver is necessary to provide an orderly process (a) for NECCO’s operations to be conducted for the remaining period until NECCO’s assets can be sold, and (b) for sale of NECCO’s assets to take place on such terms and in such time frame as will maximize the value to be received for the assets" by affidavit and/or testimony. Creditors that oppose the motion will similarly be able to offer evidence in support of their positions.
Americraft has argued that creditors would be better served if NECCO’s liquidation was undertaken through bankruptcy proceedings. It has suggested to the court that ACAS, or its affiliates, may have received preferences avoidable in bankruptcy, or it may be entitled to some recovery under principles of equitable subordination recognized by bankruptcy courts. This court takes no position on that contention. It simply notes that creditors may file involuntary bankruptcy petitions, if they believe that they are better served by bankruptcy proceedings than a state court receivership. See 11 U.S.C. § 303(b).
ORDER
For the foregoing reasons, ACAS’s Motion is DENIED WITHOUT PREJUDICE. If ACAS wishes to renew its motion, it may contact the clerk of this session to obtain an order of notice for a hearing on its renewed motion and be prepared to establish service of that notice reasonably in advance of the hearing on NECCO’s creditors.