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In re Trace International Holdings

June 25, 2009

IN RE: TRACE INTERNATIONAL HOLDINGS, INC., ET AL., DEBTORS.
JOHN S. PEREIRA, AS TRUSTEE OF TRACE INTERNATIONAL HOLDINGS, INC., ET AL., PLAINTIFF-APPELLANT,
v.
DOW CHEMICAL COMPANY, DEFENDANT-APPELLEE.



The opinion of the court was delivered by: Kimba M. Wood, U.S.D.J.

OPINION AND ORDER

CHAPTER 7

Plaintiff-Appellant John S. Pereira, as Chapter 7 Trustee (the "Trustee") of Trace International Holdings, Inc., and its related entities (collectively "Trace"), appeals a decision of the United States Bankruptcy Court for the Southern District of New York, granting summary judgment in favor of Defendant-Appellee Dow Chemical Company ("Dow"). (D.E. 23.)

For the reasons stated below, the Court vacates the decision of the Bankruptcy Court and remands the case for further proceedings.

BACKGROUND

On appeal, the parties dispute whether the Bankruptcy Court abused its discretion by judicially estopping the Trustee from characterizing as dividends payments Trace made to Dow.*fn1

These payments arose out of a transaction between Trace and Dow that was brokered via a third party, BSI Acquisitions Corp. ("BSI"). BSI's transaction with Trace was structured as a purchase of preferred stock; Trace's payments to BSI were characterized as dividends on that stock; Dow's transaction with BSI was structured as a loan; and BSI's payments to Dow were characterized as payments on that debt. In the instant action, this BSI brokered transaction has been collapsed such that payments from Trace to BSI and from BSI to Dow are treated as payments directly from Trace to Dow.*fn2 The question arises whether these payments from Trace to Dow (the "Payments") should be characterized as payments on a debt (also referred to as "liabilities"), as dividends, or as both.

In the instant action, the Trustee characterized the Payments as both liabilities and dividends (the Trustee's "Bankruptcy Court Position"). Specifically, the Trustee argued both that the Payments should be treated as liabilities for the purposes of determining Trace's insolvency ("valuation purposes"),*fn3 and that the Payments should be treated as dividends for the purpose of determining whether the Payments were illegal ("legality purposes").*fn4

After commencing the instant action, the Trustee brought a separate lawsuit before Judge Sweet, Pereira v. Cogan, 294 B.R. 449, 539-40 (S.D.N.Y. 2003) ("Cogan"), which involved the same set of facts as the instant action. The Trustee advanced the same position before Judge Sweet, that the Payments were liabilities for valuation purposes and dividends for legality purposes (the Trustee's "Cogan Position").

During the instant action's pendency before the Bankruptcy Court, Judge Sweet adopted both of the Trustees' arguments in Cogan, holding that the Payments were debts for valuation purposes but were dividends for legality purposes.*fn5 Judge Sweet did so notwithstanding that his findings appeared inconsistent with one another.

Thereafter, the Bankruptcy Court, in deciding a motion by Dow for summary judgment, judicially estopped the Trustee from arguing that the Payments were dividends for legality purposes. The Bankruptcy Court did so on the ground that the Trustee had argued to Judge Sweet that the Payments were liabilities for valuation purposes, and Judge Sweet had adopted this characterization of the Payments.*fn6

The Trustee, on appeal to this Court, argues that the Bankruptcy Court abused its discretion. The Trustee contends that his Bankruptcy Court and Cogan Positions are consistent and thus judicial estoppel is inappropriate. According to the Trustee, the inconsistency between one part of his Cogan Position (that the Payments were liabilities for valuation purposes) and one part of his Bankruptcy Court Position (that the Payments were dividends for legality purposes) does not warrant judicial estoppel as long as the Trustee's overall position before both courts (that the Payments were both liabilities for valuation purposes and dividends for legality purposes) was consistent.

DISCUSSION

The Court holds that judicial estoppel is not applicable, and remands the case to the Bankruptcy ...


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