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LFD OPERATING, INC. v. AMES DEPARTMENT STORES

September 1, 2004.

LFD OPERATING, INC., Plaintiff-Appellant,
v.
AMES DEPARTMENT STORES, INC. and AMES MERCHANDISING CORPORATION, Defendant-Appellees. In re AMES DEPARTMENT STORES, INC., et al;, Debtors.



The opinion of the court was delivered by: SIDNEY STEIN, District Judge

OPINION & ORDER

This case arises out of the bankruptcy proceedings of Ames Department Stores, Inc. and Ames Merchandising Corporation (collectively, "Ames") in the United States Bankruptcy Court for the Southern District of New York. In 2001, appellant LFD Operating Inc. ("LFD") commenced an adversary proceeding against Ames to compel Ames to turn over to LFD $8.9 million LFD claimed it was due pursuant to a contract. According to LFD, those funds are the property of LFD, not Ames. In a Memorandum Decision dated March 8, 2002, and the resulting Order and Judgment dated March 19, 2002, Bankruptcy Judge Arthur J. Gonzalez held that the disputed funds were the property of Ames, and that LFD's claims were no different than any unsecured creditor of Ames. See In re Ames Dept. Stores, Inc., 274 B.R. 600 (Bankr. S.D.N.Y. 2002). Ames now appeals from that Order and Judgment. I. BACKGROUND

A. The Ames-LFD Agreement

  The facts underlying this action are more fully set forth in Judge Gonzalez's Memorandum Decision, In re Ames Dept. Store, Inc. ("LFD"), 274 B.R. 600 (S.D.N.Y. Bankr. 2002), and familiarity with that decision is assumed. A brief summary is provided for the purposes of this appeal. LFD is the assignee of a licensing agreement dated November 17, 1987, as amended, originally between Ames and JBI Holding, Inc. ("Baker") for Baker to operate shoe departments in various Ames stores ("Agreement"). LFD, 274 B.R. at 605. Baker subsequently assigned to LFD all of Baker's rights in and to the Agreement, and LFD assumed all of Baker's obligations. Id. at 608.

  By the terms of the Agreement, in return for a licensing fee taken out of the proceeds of LFD's sales, Ames authorized LFD to operate the shoe departments in various Ames stores. LFD furnished, staffed and operated the departments. The sales were then processed through Ames's cashiers and the regular channels of Ames's business. Ames was obligated to turn over the proceeds, minus its share, to LFD on a weekly basis. The amount to be turned over to LFD each week was known as the Net Sales Proceeds. According to the terms of the Agreement, (i) all proceeds from the sale of merchandise of LFD were LFD's property from the time of sale, (ii) Ames was LFD's agent for the purpose of collecting and holding the proceeds, and (iii) Ames was to hold the proceeds in trust for LFD. (See Special Appellant's Appendix 3 at 10-11).*fn1 B. Implementation of the Agreement

  The Bankruptcy Court made the following findings with respect to the actual implementation of the Agreement. Sales of LFD merchandise were received in the same cash registers that received proceeds from Ames's merchandise. Ames identified these sales at the point of sale, and tracked them in a manner that permitted LFD to receive daily transmissions showing its footwear sales in Ames's stores. Ames maintained separate and distinct records of all sales from LFD merchandise. Ames would then use the information in its system to calculate the total proceeds from LFD sales, and calculate the amount that had to be remitted periodically to LFD. LFD, 274 B.R. at 610-11. Ames would produce a weekly statement of LFD's sales for the second preceding week, and would also remit the payment due according to that statement. Id., 247 B.R. at 607. Thus, Ames would remit a payment on a weekly basis to LFD for the sales that took place two weeks before that date. Id.

  Ames did not maintain separate bank accounts for the proceeds from LFD merchandise. Proceeds from LFD sales were deposited along with Ames's other proceeds in bank accounts, and thereafter transferred at Ames's request to certain blocked accounts established by Ames. In March 2001, Ames entered into a credit agreement with a syndicate of banks and financial institutions headed by General Electric Capital Corporation. ("GECC"). The agreement was collateralized by, among other things, Ames's inventory as reflected in a stock ledger inventory report and cash proceeds from all sources. GECC would sweep all funds from the blocked accounts into a concentration account, and apply them according to the terms of the credit agreement. GECC would then advance money to Ames (as requested and within the limits of Ames's available credit) by depositing money into a blocked Disbursement Account, which Ames used to pay all of its operating expenses. Id. at 611-12.

  It was from its Disbursement Account that Ames wired to LFD every Monday the amount of Net Sales Proceeds owed to LFD on a weekly basis (for sale of LFD merchandise during the second preceding calendar week ending the second preceding Saturday). Ames's credit limit under its agreement with GECC was reduced by reserve amounts. One of these reserves was a shoe sale reserve based on the monthly average of past payments made by Ames to LFD. This reserve, however, involved no physical segregation of the proceeds of LFD shoe sales. Id.

  C. Ames's Bankruptcy

  After a significant deterioration in Ames's financial condition, Ames's directors authorized the filing of a Chapter 11 petition on August 12, 2001. The next day, Ames ceased making wire transfers and did not wire to LFD the $2 million in Net Sales Proceeds (reflecting LFD sales from the week ending July 28, 2001) due to it on that date. One week later, Ames filed a Chapter 11 petition under the Bankruptcy Code. In addition to the August 13 payment, Ames has failed to pay LFD the Net Sales Proceeds owed LFD on August 20, August 27, September 3, and September 10, 2001.

  II. STANDARD OF REVIEW

  The findings of fact of a bankruptcy court are accepted by the district court on appeal unless they are clearly erroneous, while a bankruptcy court's findings of law are reviewed de novo. In re Manville Forest Prods. Corp., 896 F.2d 1384, 1388 (2d Cir. 1990). "A district court must accept the findings of fact of a bankruptcy court unless the party contesting the findings of fact carries the burden of establishing that the findings are clearly erroneous and that no reasonable person could agree with them." BT/SAP Pool Assocs., L.P. v. Coltex Loop Central Three Partners, L.P., 203 B.R. 527, 531 (S.D.N.Y. 1996), aff'd, 138 F.3d 39 (2d Cir. 1998). "[Q]uestions as to the ambiguity and meaning of the language of a contract" are legal questions, to be reviewed de novo. See Adirondack Transit Lines, Inc. v. United Transport, Union, Local 1582, 305 F.3d 82, 85 (2d Cir. 2002).

  III. DISCUSSION

  The principal dispute in this action is over the relationship between LFD, Ames and the Net Sales Proceeds. LFD contends that the Net Sales Proceeds are not a mere debt due it from Ames, and that LFD is not a mere creditor with respect to Ames, and therefore it is entitled to immediate payment of the $8.9 million Ames owes it, and does not have to resort to the bankruptcy process. LFD asserts that the Net Sales Proceeds are its property and that Ames held only legal but not equitable title to ...


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