Opinion
Case No. 01-60386-DOT, Procedurally Consolidated, Civil No. 3:04CV657.
November 18, 2004
Order
(Affirming an Order of the Bankruptcy Court)
THIS MATTER is before the Court on an Appeal from the United States Bankruptcy Court for the Eastern District of Virginia. Finding neither legal nor factual error in the Bankruptcy Court's ruling, and for the reasons stated in the accompanying Memorandum Opinion, IT IS ORDERED AND ADJUDGED that the Court AFFIRMS the findings of the Bankruptcy Court.
The Clerk is directed to send a copy of this Order to all counsel of record.
It is so ORDERED.
MEMORANDUM OPINION (Affirming an Order of the Bankruptcy Court)
This matter is before the Court on an Appeal from the United States Bankruptcy Court for the Eastern District of Virginia ("Bankruptcy Court"). Parties, by counsel, filed memoranda of law in support of their respective positions. The Court will dispense with oral argument because the facts and legal contentions are adequately presented in the materials before the Court, and argument would not aid the decisional process.I. Factual Procedure and History
In the early 1990s, Mr. Owais A. Dagra began operating Fas Mart Convenience Stores, Inc. ("Debtor Fas Mart Convenience Stores") and Fas Mart Petroleum, Inc ("FMP"). From June 1998 to March 2003, Appellant BP Products North America, Inc. ("BP"), formerly known as Amoco Oil Company, supplied gasoline products to Debtor Fas Mart Convenience Stores through an intermediary, FMP. On March 9, 2001, Debtor Fas Mart Convenience Stores filed a Chapter 11 bankruptcy petition.
For clarity, BP and Amoco are referred to collectively as BP throughout this Opinion.
Such intermediaries are known within the industry as "jobbers."
At the time of the bankruptcy petition, FMP was approximately $8 million in debt to BP despite holding approximately $6,968,775 in its cash accounts. On March 15, 2001, FMP provided BP with collateral to secure its obligations by executing a Credit and Security Agreement. This agreement affirmed FMP's $8 million debt and provided that BP would accept a $3 million Promissory Note in lieu of a cash payment for $3 million of that debt. This Promissory Note was secured by all of FMP's assets, including an assignment of FMP's lien on and Security Interest in Debtor Fas Mart Convenience Stores' fuel inventory.
The $8 million amount represented $6 million of past due fuel payments and $2 million of outstanding trade credit.
FMP also paid Amoco $2,362,145.00 in cash, the setoff amount of a $3,122,318.00 cash payment by FMP against $760,173.00 in credit card proceeds that Amoco was obligated to remit to Amoco.
Debtor Fas Mart Convenience Stores was not a party to the Credit and Security Agreement. Further, the Credit and Security Agreement was not approved by the Bankruptcy Court nor was notice given to Debtor Fas Mart Convenience Stores' creditors.
On March 19, 2001, FMP and Debtor Fas Mart Convenience Stores executed a $4.2 million "Grid Note" whereby FMP became Debtor Fas Mart Convenience Stores' debtor-in-possession lender. The Bankruptcy Court found that this entire amount has since been repaid by Debtor Fas Mart Convenience Stores.
In May 2002, the Bankruptcy Court found that Mr. Dagra breached his fiduciary duties to Debtor Fas Mart Convenience Stores' creditors and appointed Keith L. Philips as the Chapter 11 trustee ("Trustee") for Debtor Fas Mart Convenience Stores' business. Mr. Dagra has since fled the United States.
In March 2003, substantially all of Debtor Fas Mart Convenience Stores' assets were sold. Pursuant to an agreement among BP, FMP, and Debtor Fas Mart Convenience Stores, all proceeds were paid to BP. To date, neither Mr. Dagra nor FMP has paid BP the amounts due on the $3 million Promissory Note.
On February 16, 2004, the Trustee filed his Omnibus Objection to Certain Priority Claims. Trustee objected to certain claims by BP against Debtor Fas Mart Convenience Stores' estates.
On April 29, 2004, the United States Bankruptcy Court for the Eastern District of Virginia ("Bankruptcy Court") conducted an evidentiary hearing and held that BP did not have any allowable derivative claims. BP then asserted, for the first time, that it also held direct claims against Debtor Fas Mart Convenience Stores by virtue of its implied contractual relationship with FMP.
On August 4, 2004, the Bankruptcy Court denied BP's direct claims against Debtor Fas Mart Convenience Stores. The Bankruptcy Court found that there was no credible evidence that the cash FMP retained by virtue of the $3 million Promissory Note was ever paid to Debtor Fas Mart Convenience Stores. Further, the Bankruptcy Court held that BP's decision to extend credit to FMP via the Promissory Note did not unjustly enrich Debtor Fas Mart Convenience Stores because all of the credit extended by FMP to Debtor Fas Mart Convenience Stores has been repaid. The Bankruptcy Court also held that there was no meeting of the minds, and consequently, no contract implied in law or fact between BP and Debtor Fas Mart Convenience Stores. The Bankruptcy Court then held that the substantive consolidation of FMP and Fas Mart Convenience Stores' estates was inappropriate because BP did not deal with FMP and Fas Mart Convenience Stores as a single economic unit and consolidation would not benefit all creditors.
On August 16, 2004, Appellant BP timely noted its appeal from the Bankruptcy Court's Order. On September 13, 2004, the Clerk of the Court docketed the record on appeal, with notice provided to all parties on September 14, 2004. BP filed its opening brief on October 4, 2004. Trustee filed a response on October 14, 2004 and BP replied on October 27, 2004. This Court has jurisdiction to hear this matter pursuant to 28 U.S.C. § 158(a).
II. Standard of Review
On appeal, this 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. Findings of fact are reviewed for clear error and legal determinations are reviewed de novo. Cooper v. Productive Transp. Servs., 147 F.3d 347, 351 (4th Cir. 1998). Mixed questions of fact and law are resolved by applying a clearly erroneous standard to the factual portion and a de novo standard to the legal conclusions derived from those facts. Gilbane Bldg. Co. v. Federal Reserve Bank, 80 F.3d 895, 905 (4th Cir. 1996). Due regard is given to the Bankruptcy Court's ability to judge the credibility of the witnesses and findings of fact are not disturbed unless clearly erroneous. Cooper, 147 F.3d at 351; Fed.R.Bankr.P. 8013.
III. Summary of Parties' Arguments
The Bankruptcy Court held that: 1) Debtor Fas Mart Convenience Stores did not have an implied contract in law or fact to repay BP $2,210,776 of the original $3 million Promissory Note executed between BP and FMP; and 2) because FMP was merely a non-debtor affiliate of Debtor Fas Mart Convenience Stores, the estates of FMP and Debtor Fas Mart Convenience Stores would not be substantively consolidated.
BP now appeals the Bankruptcy Court's order arguing that it has a $2,210,776.00 direct administrative claim against Debtor Fas Mart Convenience Stores based upon either an implied contract in law or fact, and that FMP and Debtor Fas Mart Convenience Stores' estates should be substantively consolidated. The Trustee argues that the Bankruptcy Court's holdings were correct and its order should be affirmed.
The Official Committee of Unsecured Creditors of Fas Mart Convenience Stores also argues that the Bankruptcy Court be affirmed.
A. Implied Contract In Fact
BP argues that it has a $2,210,776.00 direct administrative claim against Debtor Fas Mart Convenience Stores because the Bankruptcy Court should have found a contract implied in fact between FMP and BP. Trustee argues the Bankruptcy Court correctly denied this claim because there is no implied contract in fact between Debtor Fas Mart Convenience Stores and BP.
The direct claim amount of $2,210,776.00 represents the $3 million Promissory Note, obtained as part of the March 15, 2001, Credit and Security Agreement, less the settlement amount of $789,224.00.
A contract implied in fact is "a true contract containing all necessary elements for a binding agreement except that it has not been committed to writing or stated orally in expressed terms but rather is inferred from the conduct of the parties in the circumstances." In re Brookfield Centre Ltd. Partnership, 135 B.R. 23, 28 (Bankr. E.D. Va. 1991) ( quoting MBA, Inc. v. VNU Amvest, Inc., 51 B.R. 966, 974 n. 2 (Bankr. E.D. Va. 1985). An implied in fact contract must be based on clear evidence of the parties' intent to contract, not on the parties' course of dealing. See In re Virginia Block Co., 16 B.R. 771, 774 (Bankr. W.D. Va. 1982).
According to BP, Debtor Fas Mart Convenience Stores was only able to continue operations after filing its bankruptcy petition because of the Credit and Security Agreement executed between BP and FMP. If not for BP's decision to accept FMP's $3 million Promissory Note, in lieu of a $3 million cash payment, BP argues that FMP would not have been able to serve as Debtor Fas Mart Convenience Stores' debtor-in-possession lender. Therefore, BP concludes, that the Bankruptcy Court erred in not finding an implied contract in fact between Debtor Fas Mart Convenience Stores and BP.
The Trustee counters that the $3 million Promissory Note cannot be an implied in fact contract between Debtor Fas Mart Convenience Stores and BP because it is an " actual contract" between FMP and BP. Trustee argues that BP failed to present evidence that Debtor Fas Mart Convenience Stores was a party to this contract or that the parties had any meeting of the minds as to any debt between these parties.
The Bankruptcy Court found that there was no intent to contract between BP and Debtor Fas Mart Convenience Stores. The Court explained that it had received no credible evidence that Debtor Fas Mart Convenience Stores agreed to pay BP for the amounts received by FMP under the Credit and Security Agreement. Instead, while assurances were made that BP's financial assistance was needed for Debtor Fas Mart Convenience Stores to continue operating, the Bankruptcy Court held that these were made in the context of BP's extension of trade credit, not in the context of any loan to FMP.
According to the Bankruptcy Court, Debtor Fas Mart Convenience Stores was never a party to the Credit and Security Agreement between FMP and BP, nor did it intend to contract with BP. As such, the Bankruptcy Court held that there was no implied in fact contract and that Debtor Fas Mart Convenience Stores did not incur any obligation to repay FMP's debts to BP.
This Court is of the opinion that the Bankruptcy Court's factual findings are not clearly erroneous and affirm the Bankruptcy's Courts holding that there was no implied contract in fact between the parties.
B. Implied Contract In Law
BP next argues that it has a $2,210,776.00 direct administrative claim against Debtor Fas Mart Convenience Stores because the Bankruptcy Court should have found a contract implied in law between BP and Debtor Fas Mart Convenience Stores. Trustee argues that the Bankruptcy Court's factual findings and holding that there was no implied contract in law should be affirmed.
A contract implied in law is an equitable remedy, not a true contract. MBA, 51 B.R. at 974; G.T. Fogle Co. v. United States, 135 F.2d 117, 120 (4th Cir. 1943). It is a remedy appropriate only in the absence of a true, or implied in fact, contract. Id. at 974; Nossen v. Hoy, 705 F. Supp 740, 742-43 (E.D. Va. 1990). An implied in law contract may be appropriate where a court finds: "1) a benefit conferred on the defendant by the plaintiff; 2) an appreciation or knowledge of the benefit by the defendant; and 3) the acceptance or retention of the benefit by the defendant in circumstances which make it inequitable for the defendant to retain the benefit without paying for its value." MBA, 51 B.R. at 974-75.
According to BP, Debtor Fas Mart Convenience Stores received a benefit where BP agreed to accept FMP's $3 million Promissory Note in lieu of cash. BP explains that had it refused to extend this credit FMP would have been unable to serve as Debtor Fas Mart Convenience Stores' debtor-in-possession lender, and consequentially, Debtor Fas Mart Convenience Stores would have been unable to continue operations after filing its bankruptcy petition. BP argues that Debtor Fas Mart Convenience Stores will be unjustly enriched if it is allowed to receive the debtor-in-possession financing of FMP without being required to pay back FMP's debt of $2,210,776.00 to BP.
The Trustee counters that BP failed to provide any evidence that Debtor Fas Mart Convenience Stores received a benefit from the $3 million Promissory Note between BP and FMP. Further, the Trustee argues that the Credit and Security Agreement did not enable FMP to extend debtor-in-possession credit under the "Grid Note" and therefore did not benefit Debtor Fas Mart Convenience Stores.
The Bankruptcy Court found that Debtor Fas Mart Convenience Stores had significant cash on hand at the time it filed its bankruptcy petition. It also found that Debtor Fas Mart Convenience Stores repaid all amounts due to FMP and that no evidence was presented that demonstrated FMP paid Debtor Fas Mart Convenience Stores with cash retained from the Credit and Security Agreement. Consequentially, the Bankruptcy Court held that the Credit and Security Agreement conferred no benefit upon Debtor Fas Mart Convenience Stores, Debtor Fas Mart Convenience Stores was therefore not unjustly enriched. Thus, the Bankruptcy Court found that no contract was implied in law.
This Court is of the opinion that the Bankruptcy Court's factual findings are not clearly erroneous and affirms the Bankruptcy's Courts holding that there was no implied contract in law between the parties.
C. Substantive Consolidation
BP next argues that it would be significantly harmed if Debtor Fas Mart Convenience Stores and FMP are not substantively consolidated. The Trustee argues that the Bankruptcy Court correctly denied substantive consolidation.
Substantive consolidation is appropriate where: 1) creditors dealt with the entities as a single economic unit; and 2) the affairs of the debtors are so entangled that consolidation will benefit all creditors. Union Savings Bank v. Augie/Restivo Baking Co., Ltd. (In re Augue/Restivo Baking Co., Ltd), 860 F.2d 515, 518 (2d Cir. 1988). However, substantive consolidation is to be "used sparingly" and only to prevent injustice. In re Bonham, 226 B.R. 56, 76 (Bankr. D. Alaska 1998).
BP asserts that it dealt with FMP and Debtor Fas Mart Convenience Stores as a single economic unit and conferred a benefit on Debtor Fas Mart Convenience Stores when it enabled FMP to operate as Debtor Fas Mart Convenience Stores' debtor-in-possession lender.
However, the Trustee counters that FMP and Debtor Fas Mart Convenience Stores are separate economic entities that acted adverse to and independent of one another. Further, Trustee argues that consolidation would render Debtor Fas Mart Convenience Stores' estate administratively insolvent.
The Bankruptcy Court found that: 1) BP dealt with Debtor Fas Mart Convenience Stores and FMP as separate entities, despite sharing a number of resources; 2) BP executed the post-petition Credit and Security Agreement with only Debtor Fas Mart Convenience Stores; 3) BP recognized FMP as a separate entity by brokering a deal not with debtors or their principals but just FMP; 4) Debtor Fas Mart Convenience Stores had creditors that conducted business wholly unrelated to FMP; and 5) substantive consolidation would increase total liability and harm Debtor Fas Mart Convenience Stores' creditors. The Bankruptcy Court noted that substantive consolidation between Debtor Fas Mart Convenience Stores and FMP would create the odd result of declaring a non-debtor to be a bankruptcy petitioner. It then held that substantive consolidation was inappropriate.
This Court is mindful that Debtor Fas Mart Convenience Stores and FMP are both owned by Mr. Dagra and that Mr. Dagra has fled the country to whereabouts currently unknown. However, the evidence suggests, and the Bankruptcy Court specifically held, that BP "dealt with debtors and FMP as separate entities." The Bankruptcy Court's factual findings are not clearly erroneous, and this Court will affirm the bankruptcy's courts Order denying substantive consolidation.
IV. Conclusion
Finding neither legal nor factual error in the Bankruptcy Court's ruling, IT IS ORDERED AND ADJUDGED that the Court AFFIRMS the findings of the Bankruptcy Court.
The Clerk of Court is directed to send a copy of this Memorandum Opinion to all counsel of Record.