American Cartage, Inc.

1 printed pages contain little extracted OCR body text; searchable legal-body completeness has not been established for those pages.

OCR transcription for search; preserved printed pages are authoritative

Case 03-44308 Doc 348 Filed 12/11/09 Entered 12/11/09 10:52:51 Desc Main
Document Page1of15

UNITED STATES BANKRUPTCY COURT
DISTRICT OF MASSACHUSETTS

In re : Chapter 7
AMERICAN CARTAGE, INC. : Case No. 03-44308-JBR
DEBTOR

MEMORANDUM OF DECISION ON TRUSTEE’S MOTION FOR ORDER (A) FINDING
THAT CHAPTER 7 TRUSTEE HAS EXCLUSIVE STANDING TO PROSECUTE
CLAIMS BROUGHT BY CITY SANITATION, LLC AND (B) APPROVING AND

AUTHORIZING SETTLEMENT AGREEMENT WITH ALLIED WASTE SERVICES OF

MASSACHUSETTS, LLC

The Chapier 7 Trustee successfully moved to reopen the Debtor's bankruptcy to
now seek approval of a settlement with Allied Waste Services of Massachusetts, LLC
(“Allied”'), which is being sued by City Sanitation LLC (‘City’). City opposes the
settlement on the grounds that it, as the ultimate transferee of the Debtor's assets
pursuant to a secured party sale, holds the claims against Allied; the Trustee and Allied
allege that the claims belong to the bankruptcy estate.

FACTS

In August 2002 Financial Federal Credit Inc. (“FFC”) was granted a security
interest in certain assets of the Debtor, including:

all goods, inventory, equipment, accounts, accounts receivable,

chattel paper, documents, instruments, contract rights, general

intangibles, investment property, securities entitlements, deposit

accounts, fixtures and other property, wherever located, now or

hereafter belonging to [American] or in which [American] has any

interest, and in all proceeds, insurance proceeds, substitutions,

replacement parts, additions and accessions of and/or to all of the
foregoing (collectively, the "Other Collateral").

‘Allied also operates under the name BFI.

AUTHENTICATED
U.S. GOVERNMENT
INFORMATION
GPO

Case 03-44308 Doc 348 Filed 12/11/09 Entered 12/11/09 10:52:51 Desc Main
Document Page 2 of 15

On July 23, 2003 the Debtor filed a voluntary petition under Chapter 11 of the United
States Bankruptcy Code. Shortiy thereafter the Court approved the appointment of a
Chapter 11 Trustee who retained William Zoll to assist in operating the business. At the
request of the Chapter 11 Trustee, the Court approved the stipulation between the
Debtor and FFC for the use of cash collateral. The stipulation lists FFC’s collateral as
several vehicles and assets whose description is identical to the description of the Other
Collateral.

Efforts to reorganize the business were unsuccessful and the case was
converted to Chapter 7. The Chapter 11 Trustee was appointed as the Chapter 7
Trustee. FFC obtained relief from stay to conduct a secured creditor sale of all of its
collateral. The order granting relief from stay to permit the sale of the Other Collateral,
however, was far more expansive in its description of the Other Collateral and inserted
the following language not contained in the Security Agreement, UCC1, or the
stipulation: “trade names, service names, service marks, telephone numbers, choses in
action, vehicles [certain vehicles were actually covered and sold pursuant to an earlier
order granting relief from stay].”

Todesca Equipment Co., Inc. (“Todesca’), which is alleged to be City’s straw,
was the successful buyer. The more expansive language included in the order granting
relief with respect to the Other Collateral was carried forward into the Bill of Sale. City
alleges that the assets were assigned to it but none of the parties provided a copy of the
assignment. Allied alleges that, despite the fact that the State Court Complaint avers
that a copy of the assignment is attached to the complaint as Exhibit F, no Exhibit F was

ever filed and that Allied requests that City produce a copy of the assignment have gone

2

Case 03-44308 Doc 348 Filed 12/11/09 Entered 12/11/09 10:52:51 Desc Main
Document Page 3 of 15

unanswered.

Subsequently, while the bankruptcy was siill pending, City, without notice to the
Chapter 7 Trustee, commenced a state court action against Allied and William Zoll, the
former chief financial officer and manager of the Debtor, alleging conversion of the
Debtor's assets, interference with contractual and advantageous relationships, breach
of fiduciary duty against Zoll and civil conspiracy.? City’s counsel in bringing the state
court action was the Debtor's bankruptcy counsel.

The State Court Complaint is premised on the allegation that “[a]ll of the assets
of American, inctuding without limitation customer lists, contract rights, and choses in
action, were subject to perfected security interest granted by American to Financial
Federal Credit.” The State Court Complaint, however, is replete with references to the
harm caused to the Debtor and its estate. For example, the complaint alleges that
during the pendency of the Chapter 11, Zoll, who was retained by the Chapter 11
Trustee, “engaged in a systematic manner to divert assets of American to his own
benefit and to conceal such diversion from the Chapter 11 Trustee and from the
Bankruptcy Court.” Among the specific allegations are that Zoll allegedly collected
some of the Debtor's receivables and converted them for his personal use, and caused

the Debtor to pay for goods and services used by individuals not employed by or

“The count alleging a RICO violation was dismissed.

‘State Court Complaint at J 7, attached as Exhibit C to the Trustee’s Motion for
Order (A) Finding That Chapter 7 Trustee Has Exclusive Standing to Prosecute Claims
Brought by City Sanitation, LLC and (B) Approving and Authorizing Settlement
Agreement with Allied Waste Services of Massachusetts, LLC.

‘State Court Complaint at ¥ 24.

Case 03-44308 Doc 348 Filed 12/11/09 Entered 12/11/09 10:52:51 Desc Main
Document Page 4of15

affiliated with the Debtor;° that Zoll attempted to sell and did in fact sell certain portions
of the Debtor’s business and customers, outside of the bankruptcy to a third party,
Waste Solutions, Inc. (“WSI”), in return for which he allegedly received cash and a
salaried position for a “confederate.”” Allegedly when WSI learned of the Debtor's
bankruptcy it stopped servicing the Debtor's customers and terminated Zoll’s
confederate.’ Further examples of the alleged harm to the Debtor and its estate include
City’s assertions that Zoll tried unsuccessfully to sell customer lists, contract rights, and
other assets to Waste Transport Services, Inc. (“WTS”) but claims that WTS used
information obtained from Zoll to “to obtain for [WTS’s] own account the contracts,
customers, contract lists, and equipment which Zoll had offered to sell....”°_ Indeed in the
State Court Complaint, City identifies itself as the “successor-in-interest to American
Cartage, Inc.”°

Finally the State Court Complaint alleges that Zoll and Allied acted in concert to
divert the Debtor's customers to Allied. City alleges, upon information and belief, that
Zoll was paid a commission for each customer diverted to Allied and that he was

ultimately hired by Allied. According to City, trash containers bearing the Debtor's logo

“Id.

‘id. at J 32.

‘id. at J 34.

‘id. at 137. The State Court Complaint also alleges that City has “obtained a
final, non-appealable judgment against WTS and [its principal] for conversion of some of

American's assets. /d. at J] 38.

‘ed. at 4.

Case 03-44308 Doc 348 Filed 12/11/09 Entered 12/11/09 10:52:51 Desc Main
Document Page 5 of 15

were removed and replaced with Allied’s containers and that the Debtor's containers
were never returned to the Debtor. It is unclear if these containers are among the
equipment that City avers was in the possession of the Debtor’s customers and taken
by Allied.

POSITION OF THE PARTIES

The Trustee argues that the estate owns whatever claims exist against Allied
since FFC’s security interest did not include commercial tort claims or other causes of
action, choses in action, or litigation claims. Because City is seeking damages for
alleged harm caused to the Debtor and its estate by Allied during the course of the
bankruptcy, the Trustee asserts that the post-petition claims belong only to the estate
and that he is the only party with standing to pursue these generalized business claims.
He also objects to City’s standing on equitable grounds that City’s insiders are the
Debtor's ousted insiders and that it would be unfair to permit them to benefit at the
expense of the estate’s creditors. The Trustee finally argues that FFC was paid in full
so it suffered no harm and thus had no damages to pursue. Not surprisingly, Allied filed
a memorandum in support of the Trustee’s position for the same reasons as set forth in
the Trustee’s memorandum.

City attempts to distinguish the claims at issue from commercial tort claims by
alleging that the claims are proceeds of the collateral it purchased. It argues that the
harm is not to the estate but to FFC’s collateral and that as the purchaser of the
coilateral, those claims belong now belong to it. City also argues that choses in action
existed when the foreclosure occurred and were expressly part of FFC’s collateral.

Thus City posits that the Court permitted the sale of the causes of action as part of the

5

Case 03-44308 Doc 348 Filed 12/11/09 Entered 12/11/09 10:52:51 Desc Main
Document Page 6 of 15

bankruptcy sale. In City’s view the after-acquired clause of the security agreement
would also include the causes of action that arose after FFC’s security interest was
granted. Finally it argues that, pursuant to 11 U.S.C. § 554(c), the Chapter 7 trustee
abandoned the claims when the case was previously closed.

In advocating for the approval of the settlement, the Trustee asserts that it
satisfies the test adopted in Jeffrey v. Desmond, 70 F.3d 183, 185 (1st Cir. 1995)
because, among other things, it will permit the remaining unpaid administrative and
priority claims to be paid in full and will yield a distribution to unsecured creditors.
Moreover the Chapter 7 Trustee to believe his probability of success on the merits of
the claims against Allied is very low, especially in light of his post-conversion
acquiescence to Allied’s serving the Debtor's customers to prevent those entities from
running afoul of local health ordinances causes.

Allied urges disposal of the objection on the grounds that City lacks standing.
According to Allied, City has not demonstrated it even owns the any of the assets sold
to Todesca and more importanily, City is not a creditor. City alleges that the assets
were transferred to it but none of the parties provided a copy of the transfer documents.

City responds that the settlement of claims against Allied for $12,000 is
significantly less than the claims are worth. Unlike the Chapter 7 Trustee’s assessment
of the likelinood of success on the merits, City’s assessment is that the issues are not
complex, that the Trustee has not examined any of the documents relevant to the

claims nor has he talked to City or its counsel about the claims.

Case 03-44308 Doc 348 Filed 12/11/09 Entered 12/11/09 10:52:51 Desc Main
Document Page 7 of 15

DISCUSSION

The Alleged Security interest

“[I]n the absence of statutory restrictions, the rights of the parties to secured
transactions are controlled by the agreement between them.” Mechanics Nat. Bank of
Worcester v. Killeen, 377 Mass. 100, 108, 384 N.E.2d 1231, 1236 (1979). Although the
order granting FFC relief from the automatic stay and sale order added the words
“choses in action” to the property for which relief was granted, the order granting relief
expressly provided that relief was grant “so that FFCI may enforce all of its rights under
its security interest...." Because a secured creditor can only sell and deliver title to
those assets in which it had a valid security interest in a secured creditor's sale, the
Court must examine the security agreement by which FFC acquired its interest in the
Other Collateral.

The security agreement creating FFC’s interest in the Other Collatera! did not
include a security interest in “choses in action” and thus the addition of the language
“chases in action” to the order granting relief and the bill of sale does not put otherwise
excluded assets in the collateral pool. City’s argument that a security interest in choses
in action was acquired by virtue of the cash collateral orders ignores the fact that the
replacement liens were ordered “in the same collateral and same priority as currently
exists....” Therefore FFC did not have a security interest in choses in action and
Todesca thus could not have purchased choses in action.

Even if FFC had a security interest in choses in action, the description “choses in

Case 03-44308 Doc 348 Filed 12/11/09 Entered 12/11/09 10:52:51 Desc Main
Document Page 8 of 15

action” is legally insufficient, as would the description “general intangibles,””® if the
claims are commercial tort claims. Whether the claims are proceeds of the collateral
which City acquired or commercial tort claims is governed by the Massachusetts
Uniform Commercial Code. FFC’'s security interest in the Other Collateral arose under
a security agreement executed in 2002 and thus it is governed by what is still referred to
as “new” Article 9. M.G.L. c. 106A § 9-101 et seg. Article 9 exempts certain property
from the definition of accounts. M.G.L. c. 106 § 9-102. Commercial tort claims are one
such exemption. M.G.L.c. 106 § 9-102(13) defines a commercial tort as

a claim arising in tort with respect to which:

A) the claimant is an organization; or

(

(B) the claimant is an individual and the claim:

(i) arose in the course of the claimant's business or profession; and
(

ii} does not include damages arising out of personal injury to or the death
of an individual.

FFC, which City now argues was the owner of the claims, Todesca, the purchaser, and
City, the purported transferee, and the Debtor itself are all corporations and thus
organizations as that term is used in § 9-102(13) . Shirley Medical Clinic, P.C. v. U.S.,
446 F. Supp.2d 1028, 1034 (S.D. lowa 2006). If City were to change its position again
and now argue that its claims somehow flowed through the Trustee when he allegedly

abandoned them, the outcome would be the same. Whether the Chapter 7 Trustee is

'°“One form of intangible property is a ‘chose in action,’ which in its classic sense
is a legal claim, that is, something on which an ‘action’ (a lawsuit) might be founded,
such as a right to recover a debt.” GP Credit Co., LLC v. Orlando Residence, Lid., 349
F.3d 976, 980 (7th Cir. 2003).

Case 03-44308 Doc 348 Filed 12/11/09 Entered 12/11/09 10:52:51 Desc Main
Document Page 9 of 15

viewed as an “organization” because he is the estate representative or seen as an
individual who suffered harm as a result of the operation of a business, the acts of

which City now complains are commercial tort claims.

Generic descriptions are insufficient to grant a security interest in commercial tort
claims, as are descriptions by type. M.G.L.A. 106 § 9-108(e)}(1). In Shirley Medical
Clinic the court found that a financing statement covering “proceeds from any lawsuit

due or pending” was insufficient. As Comment 5 § 9-108 notes:

Subsection (e) requires greater specificity of description in order to
prevent debtors from inadvertently encumbering certain property.
Subsection (e) requires that a description by defined “type” of collateral
alone of a commercial tort claim or, in a consumer transaction, of a
security entitlement, securities account, or commodity account, is not
sufficient. For example, “all existing and after-acquired investment
property” or “all existing and after-acquired security entitlements,” without
more, would be insufficient in a consumer transaction to describe a
security entitlement, securities account, or commodity account. The
reference to “only by type” in subsection (e) means that a description is
sufficient if it satisfies subsection (a) and contains a descriptive
component beyond the “type” alone. Moreover, if the collateral consists of
a securities account or commodity account, a description of the account is
sufficient to cover all existing and future security entitlements or
commodity contracts carried in the account. See Section 9-203(h), (i).

Under Section 9-204, an after-acquired collateral clause in a security
agreement will not reach future commercial tort claims. lt follows that
when an effective security agreement covering a commercial tort claim is
entered into the claim already will exist. Subsection (e} does not require a
description to be specific. For example, a description such as “all tort
claims arising out of the explosion of debtor's factory” would suffice, even
if the exact amount of the claim, the theory on which it may be based, and
the identity of the tortfeasor(s) are not described. (Indeed, those facts may
not be known at the time.)

Thus the relevant security agreement did not grant FFC an interest in the Debtor's

commercial tort claims by use of such words as “accounts,” general intangibles” and the

Case 03-44308 Doc 348 Filed 12/11/09 Entered 12/11/09 10:52:51 Desc Main
Document Page 10 of 15

like.

City, latching on to the last sentence of comment 5g of § 9-102 ,"' argues that its
claims are the proceeds of its collateral.'? This argument is incorrect for severa!
reasons.

Proceeds are defined in (64) of § 9-102 as follows:

(A) whatever is acquired upon the sale, lease, license, exchange,
or other disposition of collateral;

(B) whatever is collected on, or distributed on account of, coilateral;
(C) rights arising out of collateral:

(D) to the extent of the value of collateral, claims arising out of the
loss, nonconformity, or interference with the use of, defects or
infringement of rights in, or damage to, the collateral; or

(E) to the extent of the value of collateral and to the extent payable
to the debtor or the secured party, insurance payable by reason of
the loss or nonconformity of, defects or infringement of rights in, or
damage to, the collateral.

While proceeds received as compensation for harm suffered to collateral, such as

insurance proceeds for damage to a vehicle, are within the scope of proceeds of the

" Comment 5g to § 9-102 provides:
“Commercial tort claim.” This term is new. A tort claim may serve as
original collateral under this Article only if it is a “commercial tort claim.”
See Section 9-109(d). Although security interests in commercial tort
claims are within its scope, this Article does not override other applicable
law restricting the assignability of a tort claim. See Section 9-401. A
security interest in a tort claim also may exist under this Article if the claim
is proceeds of other collateral.

"Specifically City argues that the causes of action are the proceeds of the
Debtor’s accounts, equipment, contracts and contract cash proceeds, and general
intangibles. The definitions of accounts and general intangibles expressly exclude
commercial tort claims. it then argues that the claims are the proceeds of customer lists
and cash and cash equivalents.

10

Case 03-44308 Doc 348 Filed 12/11/09 Entered 12/11/09 10:52:51 Desc Main
Document Page 11 of 15

collateral, allegations of generalized harm to a business are not. Interpreting such
litigation as proceeds of collateral is the exception that would swallow the rule. The
more specific definition of commercial tort claim will govern over the more general
description of proceeds. See [n re Zych, 379 B.R. 857 (Bankr. D. Minn. 2007).

Moreover Subsection (D) includes in the definition of proceeds “claims arising out
of the loss, nonconformity, or interference” with the collateral but such claims are only
proceeds “to the extent of the value of the collateral.” FFC’s debt was paid in fult from
the proceeds of the sale. “The claim of a secured creditor to the proceeds of collateral
cannot exceed the value of the collateral.” Helms v. Certified Packaging Corp., 551
F.3d 675, 679 (7th Cir. 2008). Therefore, even if somehow the alleged general harm to
the Debtor's business could be considered “proceeds,” the value of the collateral, which
in this case was coextensive with the amount owed FFC, has already been paid in full.

Comment 15 of M.G.L. c.106 § 9-109 (“no security interest attaches under an
after-acquired property clause to a tort claim. See Section 9-204(b)”) disposes of City’s
argument that grant of a security interest in property acquired after the execution of the
security instruments is a basis for finding City owns the causes of action.

Moreover City lacks standing to bring the state court action as the buyer of the
Other Collateral because the acts complained of diminish the estate generally. They
are not injuries to City’s collateral. Indeed City’s own allegations in the State Court
Complaint admit as much. Therefore the Chapter 7 Trustee is the party with standing to
sue. Lopez-Stubbe v. Rodriquez-Estrada (In re San Juan Hotel), 847 F.2d 931, 938

(1st Cir. 1988).

Il

Case 03-44308 Doc 348 Filed 12/11/09 Entered 12/11/09 10:52:51 Desc Main
Document Page 12 of 15

Abandonment of Property of the Estate

City’s argument that the Trustee has abandoned the cause of action upon the
closing of the case is also unavailing. Property of the estate includes “[a]ny interest in
property that the estate acquires after the commencement of the case.” 11 U.S.C. §
541(a)(7). The causes of action arose during the Chapter 11 and belong to the estate.

Section 554 provides in pertinent part:

(c) Unless the court orders otherwise, any property that is scheduled

under section 521(1) of this title and that is not administered before a case

is closed under section 350 of this title is deemed abandoned.

(d) Unless the court orders otherwise, property of the estate that is not

abandoned under subsection (b) or (c) of this section and that is not

administered in the case remains property of the estate.
While ordinarily assets not otherwise administered are deemed abandoned, one
obvious exception is that property that is not scheduled is not deemed abandoned. The
causes of action against Allied and Zoll were not scheduled; indeed they could not have
been without amending the schedules to note the existence of the claims. But
according to City, the causes of action were kept secret from the Trustee so he lacked
the requisite knowledge to amend the schedules to include these causes of action.
Thus the causes of action were not deemed abandoned when the case was previously
closed. Additionally “once a case is reopened, the original case is revived, including all
procedural and substantive rights of the debtor and presumably the trustee...
reopening and thereby reviving a debtor's case would effectively negate any technical

abandonments which may have occurred when the case was originally closed.” /n re

Shelton, 201 B.R. 147, 155 (Bankr. E.D.Va.1996).

12

Case 03-44308 Doc 348 Filed 12/11/09 Entered 12/11/09 10:52:51 Desc Main
Document Page 13 of 15

The Settlement Agreement

City has not demonstrated that it has standing to object to the settlement.
Although the assignment of assets purchased by Todesca is questionable, in any event
City is not a creditor of the estate. Nevertheless the Court has an obligation to
determine whether the proposed settlement should be approved, a decision that is

placed within the sound discretion of the Court. Jeffrey, 70 F.3d at 185.

The well known test set forth in Jeffrey continues to be the test against which
compromises are measured. The four factor test requires examination of
(i) the probability of success in the litigation being compromised;

(ii) the difficulties, if any, to be encountered in the matter of collection;

(iii) the complexity of the litigation involved, and the expense, inconvenience and
delay attending it; and,

(iv) the paramount interest of the creditors and a proper deference to their
reasonable views in the premise.

ld. “The court's consideration of these factors should demonstrate whether the
compromise is fair and equitable, and whether the claim the debtor is giving up is
outweighed by the advantage to the debtor's estate.” Jeremiah v. Richardson, 148 F.3d
17, 23 (1st Cir. 1998). The Court is not to substitute its judgment for the Trustee but
only to weigh whether the Trustee’s judgment satisfies the lowest threshold of
reasonableness, Moorhead v. Burdick (in re Moorhead ), 208 B.R. 87, 89 (1st Cir. BAP

1997), affd 201 F.3d 428 (1st Cir. 1998).

In this instant case, the Trustee was the ultimate party responsible for operating
the Debtor's business. He retained Zoll and it was on the trustee’s motion that the case

was converted to Chapter 7. The Trustee has stated that he believes the allegations

13

Case 03-44308 Doc 348 Filed 12/11/09 Entered 12/11/09 10:52:51 Desc Main
Document Page 14 of 15

against Zoll and Allied are unfounded. He believes that Allied, with his knowledge,
stepped in to fill the Debtor's customers’ needs for trash pick up on a regular basis to

avoid the customers’ violating various health ordinances.

Moreover the Trustee has no funds in the estate with which to undertake an
action against Allied. Although trustees can and do pursue claims that will yield a
recovery for the estate in no-asset cases, a trustee should not be compelled to forego

settlement and pursue claims he believes will yield little or no benefit to creditors.

That City received a judgment against WSI, a judgment that may in fact belong to
the estate, does not undermine the settlement. City has not proffered any evidence as
to whether the judgment was entered by default, whether it was a result of an

agreement between City and WSI, or even the amount of the judgment.

in light of the difficulty the Trustee believes is inherent in obtaining a judgment
against Allied, the estate’s lack of funds to finance such litigation, and the fact that the
settlement will permit administrative and priority claims to be paid in full and still yield a
distribution to unsecured creditors, the Trustee has meet his burden of satisfying the
Jeffrey test.
Conclusion

For the reasons set forth herein, the Trustee’s Motion [#318] is GRANTED.

A separate Order will issue. fee Z , p

Dated: December 10, 2009 Joel B. Rosenthal
United States Bankruptcy Judge

14

Case 03-44308 Doc 348 Filed 12/11/09 Entered 12/11/09 10:52:51 Desc Main
Document Page 15 of 15

15