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In re Modern Plastics Corporation

United States District Court, W.D. Michigan, Southern Division

September 22, 2017

In re MODERN PLASTICS CORPORATION, Debtor. NEW PRODUCTS CORPORATION, Appellant,
v.
THOMAS R. TIBBLE et al. Appellees.

          OPINION

          JANET T. NEFF, UNITED STATES DISTRICT JUDGE.

         This is an appeal from a judgment in an adversary proceeding in the Bankruptcy Court of the Western District of Michigan. Modern Plastics Corporation ceased operations in 2008 and filed a petition for relief under Chapter 7 of the Bankruptcy Code in January 2009. The assets in the estate included 12 acres of real estate in Benton Harbor, Michigan, on which sat Modern Plastics' offices, warehouse, and a manufacturing facility (the “Property”). Appellee Thomas Tibble was appointed as the trustee for the bankruptcy estate. Appellant New Products is a creditor of Modern Plastics. In 2013, New Products brought an adversary action against Tibble, claiming that he breached his fiduciary duties by, among other things, failing to protect, maintain, and insure the Property, and by failing to object to excessive tax assessments against the Property. The bankruptcy court dismissed New Products' action after determining that Tibble did not breach any fiduciary duties during the relevant time period. New Products appeals the dismissal of its action. Having considered the parties' briefs and the record, the Court finds that oral argument is unnecessary. For the reasons discussed herein, the Court affirms the judgment of the bankruptcy court.

         I. Background

         When Modern Plastics filed for bankruptcy, the Property was encumbered by over $1.6 million in liens. Approximately $1.3 million of that amount was owed to Bank of America (“BOA”). The remaining portion was owed to state and local taxing authorities. In addition, the building on the Property was in need of maintenance and repair. The roof of the building was leaking, resulting in pools of standing water in the facility. There were also significant environmental concerns. An internal assessment by BOA estimated that clean-up costs could exceed $500, 000.[1] (Siravo Dep., PageID.5367.)

         A broker informed BOA that the “highest and best” use for the Property would be a redevelopment site, due to the age and condition of the building and the poor market for old industrial buildings in the area. (PageID.4158.) Similarly, an appraisal procured by BOA in March 2008 opined that redeveloping the Property would be “the only alternative to provide an adequate return on investment.” (PageID.498.) The appraisal valued the Property at $1, 050, 000. (PageID.450.)

         Shortly before the petition for bankruptcy, a developer offered to purchase the Property for $650, 000. BOA agreed to this sale. After the petition for bankruptcy, Tibble sought approval of the sale from the bankruptcy court. The proposed sale included a $10, 000 carve-out for the estate, but the sale was not finalized. In August 2009, Tibble attempted to sell the Property to the same party for $590, 000, including a $20, 000 carve-out for the estate. BOA agreed to this sale as well, but the buyer did not exercise its option to purchase the Property.

         When Modern Plastics filed its bankruptcy petition, it notified BOA and Tibble that the Property was not insured. BOA initially maintained casualty insurance on the Property, but after consulting with Tibble in November 2010, BOA decided not to continue paying for insurance coverage. Steven Siravo, BOA's loan officer in charge of Modern Plastics' account, told Tibble that the bank was not willing to put any more of its money into the Property. (PageID.416.)

         During Tibble's tenure as trustee, the condition of the building on the Property deteriorated substantially as a result of vandalism, theft, and a lack of maintenance. Large quantities of metal and other materials, including structural components of the building, were taken away and sold for scrap. One scrapper worked on the site for eight hours a day, five days a week, for seven months. Eventually, the roof of the building collapsed. During this time, Tibble made no effort to secure or maintain the Property, and BOA took no action to exercise control over it.

         New Products, which has offices and a manufacturing facility located across the street from the Property, initially held an unsecured claim against Modern Plastics for $19, 113.82. In March 2013, it purchased the loan documents between BOA and Modern Plastics for $225, 000, after much of the deterioration to the Property had already occurred. Soon thereafter, Tibble filed a report deeming the Property to be abandoned.[2] New Products subsequently brought an adversary action against the estate, Tibble, and Tibble's surety, Federal Insurance Company, seeking to recover any diminution in value of the Property during Tibble's tenure as trustee, under the theory that Tibble had breached his fiduciary duties to the estate and its creditors. Following several motions for summary judgment and a bench trial focused on the value of the Property, the bankruptcy court ruled in favor of the defendants. New Products filed a motion for relief from judgment, and the bankruptcy court denied its motion. New Products appeals the bankruptcy court's rulings to this Court.

         II. Standard

         The bankruptcy court's conclusions of law are reviewed de novo. Rowell v. Chase Manhattan Auto. Fin. Corp. (In re Rowell), 359 F.Supp.2d 645, 647 (W.D. Mich. 2004). “Under a de novo standard of review, the reviewing court decides an issue independently of, and without deference to, the trial court's determination.” Menninger v. Accredited Home Lenders (In re Morgeson), 371 B.R. 798, 800 (B.A.P. 6th Cir. 2007).

         The Court applies the clearly erroneous standard when reviewing the bankruptcy court's findings of fact. Stamper v. United States (In re Gardner), 360 F.3d 551, 557 (6th Cir. 2004). “A finding of fact is clearly erroneous ‘when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.'” Riverview Trenton R.R. Co. v. DSC, Ltd. (In re DSC, Ltd.), 486 F.3d 940, 944 (6th Cir. 2007) (quoting Anderson v. City of Bessemer City, N.C. , 470 U.S. 564, 573 (1985)).

         III. Analysis

         A. The bankruptcy court properly limited New Products' claim to the period of time from March 4, 2013 to January 6, 2014.

         The bankruptcy court held that New Products did not have standing as an unsecured creditor to assert a claim for breach of fiduciary duty, and did not have standing as a secured creditor until March 4, 2013, the date that BOA assigned the loan documents to New Products. (7/23/2015 Mem. Decision & Order, PageID.1431.) Consequently, the court limited New Products' claim against Tibble to the period of time running from the date that New Products acquired the loan documents until the date that the court approved the abandonment of the Property.

         New Products contends that it obtained BOA's rights to pursue a claim against Tibble. According to the assignment agreement between BOA and New Products, BOA assigned all “right, title and interest, and obligations in, to and under the Loan Documents.”[3] (Loan Purchase & Assumption Agreement, PageID.1459.) In other words, BOA assigned its rights against Modern Plastics under loan agreements. BOA did not assign any rights against Tibble, let alone a right to recover from Tibble for breach of a fiduciary duty. An assignee of a mortgage stands in the same shoes as the original holder of the mortgage, with the same right to enforce the mortgage. But the right to enforce a mortgage is separate and distinct from the right to bring a tort claim against a third party based on a duty arising apart from the mortgage agreement. See Macomb Interceptor Drain Drainage Dist. v. Kilpatrick, 896 F.Supp.2d 650, 660-61 (E.D. Mich. 2012) (“[T]he ability of an assignee to enforce contractually-created rights does not necessarily permit the assignee to also bring tort or statutory claims that are merely related somehow to the contractual relationship but that arose outside of the rights created by the contract.”). Nothing in the assignment agreement purports to transfer anything other than the loan documents and the rights therein. Thus, BOA did not assign its right to pursue a claim against Tibble.

         B. New Products did not have standing as an unsecured creditor to bring a claim against Tibble.

         The bankruptcy court also held that New Products could not pursue a claim against Tibble in its capacity as an unsecured creditor because the trustee represents the estate, not the creditors. (Pre-Trial Conf. Tr. 27-28, PageID.3227-3228.) The trustee who replaced Tibble in 2014 indicated that she was not going to pursue a claim against him. (Id.)

         New Products acknowledges that the trustee represents the estate, but contends that the bankruptcy court could have given New Products derivative standing to pursue a claim against Tibble for any deterioration to the Property prior to the date of assignment of the loan documents. However, New Products never raised the possibility of derivative standing until after the court entered judgment against it.

         Moreover, New Products has not shown that it met the requirements for derivative standing. “[A] party moving for derivative standing must show that: (1) a demand was made on the trustee (or debtor-in-possession) to act, (2) the trustee (or debtor-in-possession) declined, (3) a colorable claim exists that would benefit the estate, and (4) the trustee's (or debtor-in-possession's) inaction was an abuse of discretion.” Hyundai Translead, Inc. v. Jackson Truck & Trailer Repair, Inc. (In re Trailer Source, Inc.), 555 F.3d 231, 245 (6th Cir. 2009). Derivative standing must be “judicially approved” so that “the bankruptcy court's ability to coordinate proceedings is not impaired.” Id.

         New Products does not claim that it made a demand on the trustee that the trustee declined. Thus, it has not established that the bankruptcy court erred by failing to grant it derivative standing.

         C. The bankruptcy court properly held that Tibble did not breach his fiduciary duties.

         The bankruptcy court held that Tibble did not breach his fiduciary duties as trustee after holding a bench trial focused on the value of the Property. At the conclusion of New Products' case, the bankruptcy court held that the liens against the Property far exceeded its value. The court observed that a trustee must exercise due diligence to conserve the assets of the bankruptcy estate, using the “‘measure of care, diligence and skill required of . . . an ordinarily prudent man in the conduct of his affairs under similar circumstances and of a similar object in view[.]'” (12/18/2014 Mem. of Decision & Order, PageID.896 (quoting Reich v. Burke (In re Reich), 54 B.R. 995, 998 (Bankr. E.D. Mich. 1985).) “[I]f the Property promised no benefit to the estate [because its value did not exceed the debt secured by the mortgage and the tax liens], the Trustee would have no need or justification to use unencumbered estate resources to preserve it. Indeed, unsecured creditors could justifiably complain under those circumstances if the Trustee used estate property to benefit BOA at their expense[.]” (Id.)

         In other words, Tibble's duties ran to multiple parties with competing interests in estate property. “The Chapter 7 trustee is an officer of the court and owes a fiduciary duty both to the debtor and to the creditors as a group.” Germain v. Conn. Nat'l Bank, 988 F.2d 1323, 1330 n.8 (2d Cir. 1993). The trustee “‘primarily represents the unsecured creditors, and represents the secured creditors only in his capacity as a custodian of the property upon which they have a lien.'” Ford Motor Credit Co. v. Weaver, 680 F.2d 451, 462 n.8 (6th Cir. 1982) (quoting The Second Nat'l Bank of Nazareth v. Marcincin (In re Nadler), 8 B.R. 330, 333 (Bankr. E.D. Pa. 1980)). Tibble was not obligated to use estate property or resources available to the unsecured creditors in order to prop up the value of property fully encumbered by the interests of secured creditors. “[A]t no time does [the trustee] have a duty to manage assets, which have no value to the estate, for the benefit of secured creditors.” United States ex rel. The People's Banking Co. v. Derryberry (In re Peckinpaugh), 50 B.R. 865, 869 (Bankr.N.D.Ohio 1985); see also In re Nadler, 8 B.R. at 334 (“[T]he trustee could not have been expected to expend time which would not eventually or potentially have benefitted general creditors of the estate.”). “The secured creditor must exercise reasonable diligence to protect the property serving as security. The trustee must also exercise diligence to conserve the assets of the bankruptcy estate, but he is not relegated to the role of a ‘babysitter' for the secured creditors.” Fox v. Anderson (In re Thu Viet Dinh), 80 B.R. 819, 823 (Bankr. S.D.Miss. 1987). If Tibble had taken the actions that New Products claims he should have taken, he would have used time and resources available to the general creditors of the estate, solely for the benefit of a secured creditor. Doing so would have conflicted with his duty to conserve the assets of the estate for the benefit of all the creditors of the estate.

         Evidence that BOA declined to insure the Property and that the building contributed relatively little to the Property's value provides further support for the reasonableness of Tibble's actions. It would make little sense for a trustee to expend resources protecting fully-encumbered property that has minimal value for the secured creditor, let alone the estate.

         Moreover, as secured creditors, BOA and New Products had means t o p r o t e c t t h e i r p r o p e r t y that was not available to unsecured creditors of the estate. A secured creditor is entitled to “adequate protection” of the value of its collateral, and may obtain relief from the automatic stay in bankruptcy in order to obtain this protection. 11 U.S.C. § 362(d)(1). A secured creditor also has the right to request a condition on the use, sale, or lease of its collateral by the trustee. 11 U.S.C. § 363(e). This protection “is designed to protect a secured creditor . . . against any decrease in the value of its collateral which may result from depreciation, destruction, or the debtor's use of the collateral.” Volvo Commercial Fin. LLC the Am. v. Gasel Transp. Lines, Inc. (In re Gasel Transp. Lines, Inc.), 326 B.R. 683, 691-92 (B.A.P. 6th Cir. 2005) (Gregg, J., concurring). Neither BOA nor New Products ever sought the protections available to them.

         New Products suggests that Tibble should have abandoned the Property as soon as he determined that it had no value for the estate, but the Bankruptcy Code did not require him to do so. See 11 U.S.C. § 554(a) (providing that the trustee “may” abandon property that is of inconsequential value and benefit to the estate); see also Rambo v. Chase Manhattan Mortg. Corp. (In re Rambo), 297 B.R. 418, 433 n.23 (Bankr. E.D. Pa. 2003) (noting that instead of filing motions to abandon property that has inconsequential value for the estate, “most trustees do not administer (i.e., seek to sell) such property, leaving the abandonment to occur at the closing of the case[.]”). Tibble had an opportunity to sell the Property with BOA's approval shortly after the petition for bankruptcy. It was not unreasonable for him to keep the Property within the estate for a period of time rather than abandon it, particularly where the sale transactions offered some benefit for the estate in the form of carve-outs from the proceeds of the sale.

         New Products argues that it was presumptively improper for Tibble to attempt to sell the Property with a carve-out for the estate, though New Products does not explain why that would be the case. The estate would have benefitted from a carve-out, and the party with the greatest interest in the terms of the sale, BOA, approved it. Thus, Tibble ...


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