City Sanitation, LLC v. Allied Waste Services of Massachusetts, LLC (In re American Cartage, Inc.)

(No. 10-2284), 2011 WL 3831891 (1st Cir. Aug. 31, 2011)
(1) Where "commercial tort claims" were not included in grant of security interest, subsequently arising claims for conversion, breach of fiduciary duty, and related torts allegedly committed during case and relating to value of Debtor's business inventory, equipment, accounts and general intangibles are not "proceeds" of those assets, and purchaser of those assets via secured party sale did not acquire the commercial tort claims as "proceeds" of the purchased collateral (an issue of first impression in the First Circuit) or as "successor" to the Debtor; (2) chapter 7 trustee was permitted to reopen case to administer commercial tort claims that had been brought in state court by asset purchaser after case closed, and had exclusive standing to prosecute and settle those claims; (3) $12,000 settlement of those claims was properly approved by bankruptcy court; (4) asset purchaser failed in its Rule 8006 statement of issues on appeal to adequately raise and preserve its argument that the unadministered commercial tort claims were abandoned by operation of law under Section 554(c) when chapter 7 case closed, and could not be administered by chapter 7 trustee in reopned case; and (5) no "exceptional circumstances" existed which would prevent waiver of inadequately preserved issue on appeal (a point which the First Circuit stated it had "heretofore avoided ruling on" but which was presented "head on" in this case).
Procedural context:
Bankruptcy court entered a cash collateral order in the Debtor's chapter 11 case granting secured creditor a replacement lien. While the Debtor's pre-petition security agreement included most traditional asset categories, neither it nor the cash collateral order specifically mentioned "commercial tort claims" as defined in UCC 9-102. A Chapter 11 trustee was soon appointed; the case subsequently converted to chapter 7, and the secured creditor obtained relief from stay to foreclose on its collateral. After the chapter 7 clase closed, the purchaser of secured creditor's collateral filed suit in state court against managers and consultants retained by chapter 11 and 7 trustee, alleging a variety of tort claims (e.g. conversion, breach of fiduciary duty), claiming to be "successor in interest" to the Debtor. Upon learining of the suit, the Chapter 7 trustee moved to reopen the chapter 7 case and settled (for $12,000) all state court claims asserted by purchaser as being "commercial tort claims" and exclusively property of the estate. The Bankruptcy Court approved the settlement, and the purchaser appealed. The District Court affirmed, also ruling that there was insufficient language in the purchaser's statement of issues on appeal from which the court could reasonably infer that the purchaser had preserved its argument that the state court claims settled by the trustee in the reopened case had already been abandoned by operation of law under Section 554(c) when the chapter 7 case initially closed, and could not be administered in the reopened case.
Debtor American Cartage granted blanket security interest to Financial Federal Credit, Inc. ("FFC"), including most traditional asset categories and their proceeds, but without mention of commercial tort claims. After Debtor filed chapter 11, a cash collateral order granted FFC replacement liens, again without mention of commercial tort claims. A Chapter 11 trustee was soon appointed, and retained a consultant to assist to assist in the reorganization. Upon conversion of the case to chapter 7, the same trustee was appointed; he retained the same consultant; and consultant retained appellant Allied Waste Services ("Allied") to service Debtor's customers and assist in winding down Debtor's business. FFC obtained relief from stay to foreclose on its collateral, selling it to Todesca Equipment Co., which in turn sold it to appellant City Sanitation, LLC ("City"). The chapter 7 trustee filed his final report, which made no mention of pre- or post-petition commercial tort claims, and the Chapter 7 case closed. Sometime thereafter, City filed a complaint in state court as the Debtor's "successor in interest," alleging various torts against Allied and the consultant in the management of the Debtor's business during their respective tenures in the case. When Allied advised the chapter 7 trustee of the state court action, the trustee moved to reopen the case--18 months after it had closed--and asserted exclusive standing over the state court claims. The Bankruptcy Court approved Allied and the Trustee's settlement of those claims for $12,000 (over City's objections), ruling that the claims asserted harm of a sufficiently general nature as to not belong to any individual creditor, and were thus exclusively assertable by the trustee; and that the claims qualified as "commercial tort claims" which were never identified or described with the particularity required by UCC 9-102 or 9-108 to be included within FFC's collateral, let alone to constitute proceeds of FFC's collateral that could have been acquired by City.
Selya (author), Howard and Thompson

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