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In Re: Futter Lumber Corporation v. Todd E. Duffy

March 24, 2012

IN RE: FUTTER LUMBER CORPORATION, DEBTOR.
BERNICE FUTTER, ILEANA FUTTER, JAMES FUTTER, DAVID KORKHAM AND LYN GAYLORD, PETITIONERS,
v.
TODD E. DUFFY, TRUSTEE FOR THE FUTTER LUMBER CORPORATION LIQUIDATION TRUST, RESPONDENT.



The opinion of the court was delivered by: Spatt, District Judge.

MEMORANDUM OF DECISION AND ORDER

The Petitioners Bernice Futter, Ileana Futter, James Futter, David Korkham and Lyn Gaylord, (collectively, the "Petitioners" or the "Defendants"), seek leave to file an interlocutory appeal from a decision of the Bankruptcy Court (Dorothy D.T. Eisenberg, J.), denying their motion to dismiss an adversary proceeding commenced by the Respondent, Todd E. Duffy, as trustee for the Futter Lumber Corporation Liquidation Trust. For the reasons that follow, the Court denies leave to file an interlocutory appeal.

I. BACKGROUND

A. The Bankruptcy and Chapter 11 Reorganization Plan

The Debtor, Futter Lumber Corporation ("Futter"), was a lumber wholesaler and distributor. The corporation was privately held and owned by Bernard Futter; Bernice Futter, his wife; Bernard Futter as Trustee f/b/o the Bernard Futter Trust; and Kenneth Futter as Trustee of the Ileana Futter Trust, the David Futter Trust, and the James Futter Trust. On May 8, 2009, an involuntary petition was filed under Chapter 7 of the Bankruptcy Code against the Debtor in the Bankruptcy Court. It was subsequently converted to one under Chapter 11 on June 11, 2009.

The Debtor had three non-debtor affiliates - Futter Trading LLC, Futter West LLC, and Global Wood LLC (collectively, the "Affiliates"). The ownership interests in the Affiliates were held by Bernard Futter and his children, David Futter, James Futter, and Ileana Futter. As explained in greater detail in the Bankruptcy Court's Order, the Affiliates owed the Debtor approximately $4.5 million in receivables related to services and financial accommodations. After winding down the businesses, the Affiliates held approximately $1.3 million, which was turned over by the Affiliates to the Debtor to help fund the Debtor's liquidating Chapter 11 reorganization plan (the "Plan").

On June 9, 2010, the Debtor's Plan was confirmed by the Bankruptcy Court. Article 8.4 of the Plan provided for general releases whereby creditors agreed to release, waive or discharge all claims and causes of action based on any act, omission, transaction or other occurrence involving the Debtor in connection with, or in contemplation of, the bankruptcy case that such creditor has or may have against the Debtor and the bankruptcy estate, the officers and directors of the Debtor, the Creditors Committee and each member thereof, and the professionals retained by them. In addition, specific releases were given to Bernard Futter and Kenneth Futter in the Plan. As part of the consideration for the specific releases given in favor of these two individuals, the general unsecured claim of Bernard Futter was reduced by $114,300 and allowed in the amount of $1,418,695, and the general unsecured claim of Kenneth Futter was reduced by $35,700 and allowed in the amount of $444,300 (the "Settlement"). (Plan, at 24.)

Pursuant to the confirmed Plan, a liquidation trust was established with the Respondent as Liquidation Trustee. It was created to administer and reduce to cash all of the Debtor's property, rights and interest; to resolve all claims and causes of action; and to make distributions for the benefit of holders of allowed claims against the Debtor. A liquidation trust agreement was entered into post-confirmation between the Debtor's bankruptcy estate and the Trustee, which stated that all of the Debtor's "Causes of Action" were to be fully preserved and retained exclusively by the Liquidation Trust. Pursuant to Article 1.1 of the Plan, "Causes of Action" were defined to mean "any and all rights or claims that the Debtor has or may have against any third party including, without limitation, all Avoidance Actions . . . ." (Plan, at 5.) "Avoidance Actions" included "any claim, right or causes of action under Chapter 5 of the Bankruptcy Code; all fraudulent conveyance and fraudulent transfer laws; all non-bankruptcy laws vesting in creditors rights to avoid, rescind, or recover on account of transfers; all preference laws and the New York Debtor & Creditor Law." (Id., at 4.)

The Bankruptcy Court also approved the disclosure statement (the "Disclosure Statement"), finding that it provided the creditors with sufficient information as to the Plan as required under the Bankruptcy Code. The Disclosure Statement provided as follows:

Review of Certain Claims and Causes of Action

During the pendency of the Chapter 11 case, at the Committee's request, the Debtor provided the Committee's financial advisors with full access to its books and records.the Committee's financial advisors were provided, among other things, documents relating to i) the Affiliates; ii) claims held by insiders; iii) payments to insiders and iv) loans made by insiders to the Debtor. . . .

The analysis by the Committee's financial advisors enabled them to evaluate and consider potential claims against the Affiliates and claims against the insiders, and eventually in reaching an agreement with the Debtor regarding the contribution of funds from the Affiliates and the reductions in the claims of Bernard and Kenneth Futter.

In an effort to resolve any potential claims and causes of action against the Affiliates or the insiders on a consensual basis, the Debtor's [P]rincipals agreed under the Plan to (a) cause the Debtor's estate to receive approximately $1.3 million held by the Affiliates . to fund distribution under the Plan . . . . (Disclosure Statement, at pp. 12-13 (emphasis added).) The meaning of this provision of the disclosure statement is in dispute. The Respondent asserts that this is only in reference to the Settlement described above and in particular, that the $1.3 million was consideration for the release of claims only as to Bernard and Kenneth Futter. However, the Petitioners interpret the term "insiders" more broadly and claim that it includes causes of action as against them as well, because under the Bankruptcy Code, they were either an officer, or a relative of a director or officer, of the Debtor at the time of the Debtor's bankruptcy. See 11 U.S.C. § 101(31).

The Disclosure Statement also contained language regarding the preservation of causes of action by the Liquidating Trustee, now the Respondent. In particular, it stated that:

Identified in the Debtor's Statement of Financial Affairs at question 3(a) is a non-exclusive list of certain potential Causes of Action, which are expressly identified and preserved for possible prosecution on and after the Effective Date. The failure to list any potential or existing claims or Causes of Action is not intended to and shall not limit the rights of the Liquidation Trustee to pursue any claims or Causes of Action not listed or identified.The Confirmation Order shall not bar the Liquidation Trustee, on behalf of the Liquidation Trust, by res judicata, collateral estoppel, or otherwise from collecting, prosecuting, or defending any matter or Cause(s) of Action. (Disclosure Statement, p. 23 (emphasis added).)

The final Disclosure Statement was the end result of a process of several negotiations, amendments, and Bankruptcy Court hearings. According to the Petitioners, it was amended to address the Bankruptcy Court's two concerns relating to (1) the resolution of claims against Affiliates and insiders; and (2) to provide a detailed description of the claims by and against insiders and the resolution of such claims. According to the Respondent, the negotiations as to the Plan primarily concerned only the recovery of the $4.5 million intercompany receivable, as well as relinquishing the causes of action specifically as to Bernard Futter and Kenneth Futter. In fact, the Respondent alleges that the sentence concerning resolution of potential causes of action against the insiders was added after the Bankruptcy Court hearings and revisions, and that a broadly based release as against all insiders had never been discussed.

B. The Adversary Proceeding and the Motion to Dismiss

On May 9, 2011, the Trustee commenced an adversary proceeding against the current Petitioners, in their capacity as "insiders" of the Debtor under the Bankruptcy Code. See 11 U.S.C. ยง 101(31) ("The term 'insider' includes - . . . (i) director of the debtor; (ii) officer of the debtor; . . .or (vi) relative of a general partner, director, officer, or person in control of the debtor"). The Defendants in the adversary proceeding, now the current Petitioners, are: Bernice Futter, an ...


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