ABCD Holdings, LLC v. Hannon, et al. (Lawyers Weekly No. 12-068-17)

Plaintiff ABCD Holdings, LLC, (“Holdings”) has sued Patrick J. Hannon in part to enforce Hannon’s personal guaranty of one-half of the amount that Holdings loaned to Ware Real Estate, LLC (“Ware”) and ABC&D Recycling, Inc (“Recycling”). Holdings claims that Hannon is liable under his limited guaranty to repay $ 109,879.50 (half the original loan amount) plus reasonable collection costs.
In response, Hannon has asserted various counterclaims and third-party claims alleging, in essence, that George McLaughlin deliberately prevented Ware and Recycling from repaying what they owed under their note by using Holdings to take control of Ware and Recycling and then transferring their assets and business operatings to a new entity called Tri County Recycling, Inc. (“Tri County”).
The parties sued by Hannon—i.e., McLaughlin, Holdings, Ware, Recycling, and Tri County—have moved to dismiss Hannon’s claims. They claim that Hannon’s claims are all barred by a release executed by the Chapter 7 trustee of Hannon’s bankruptcy estate. In addition, Tri County asserts that the allegations against it do not state viable claims even if the claims were not barred by the release.
The Court concludes that these arguments are without merit. It will therefore DENY the motion to dismiss Hannon’s counterclaims and third-party claims.
1 Reach and Apply Defendants J. Derenzo Co.; J. Derenzo Construction Company, Inc.; Sofia Gagua; RHR, LLC; Patrick J. (“P.J.”) Hannon; Similar Soils, Inc.; Immanuel Corp.; Agritech, Inc.; and L-5, Inc.
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1. Settlement Agreement and Release. Hannon filed a petition under Chapter 11 of the United States Bankruptcy Code on May 3, 2012. That bankruptcy case was converted to a Chapter 7 or liquidation proceeding on January 2, 2013. The bankruptcy trustee sued Bright Horizon, LLC (“Bright Horizon”) and The McLaughlin Brothers, P.C. (“McLaughlin Bros.”) to recover various payments Hannon had made to them.
In May 2015 the bankruptcy trustee entered into a settlement agreement in which George McLaughlin, Bright Horizon, and McLaughlin Bros. agreed to pay the bankruptcy estate $ 45,000. In exchange, the trustee released all claims “whether known or unknown” that the estate or Hannon may have against George McLaughlin, Bright Horizon, McLaughlin Bros., or “any entity owned by any of” them. The settlement agreement states that it is releasing such claims “to the Trustee’s full authority to waive such claims.”
McLaughlin asserts that he owns Holdings, Recycling, Ware, and Tri County, and that the release executed by the bankruptcy trustee therefore bars all of Hannon’s counterclaims and third-party claims in this action. The Court disagrees.
Hannon’s claims in this action all arise at least in part from alleged acts by McLaughlin and his companies that occurred after Hannon’s bankruptcy petition was converted to a Chapter 7 proceeding in January 2013. Hannon alleges in his pleading that McLaughlin has been in full control of Recycling and Ware “since February 6, 2013,” and that since that time McLaughlin has taken steps to ensure that neither Recycling nor Ware has repaid any part of the loan to Holdings. He further alleges that Tri County was incorporated in May 2014, and that around that time McLaughlin terminated the business operations of Recycling and Ware and shifted those operations to Tri County.
Hannon correctly argues that the bankruptcy trustee had no power to release claims that were never part of the bankruptcy estate. See In re Ontos, 478 F.3d 427, 431 (1st Cir. 2007). “It is axiomatic that a Chapter 7 trustee may only release claims that he has the power to assert.” In re Pierport Dev. & Realty, Inc., 502 B.R. 819, 825 (Bankr. N.D.Ill. 2013), quoting In re Cent. Ill. Energy, LLC, 406 B.R. 371, 373–74 (Bankr. C.D.Ill. 2008).
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McLaughlin and the other moving parties respond by pointing out that Hannon’s bankruptcy estate included not only all claims belonging to Hannon as of May 3, 2012, when he first filed for bankruptcy, but also all other claims arising up until the time when the bankruptcy case was converted to a Chapter 7 proceeding, which occurred on January 3, 2012. See 11 U.S.C. § 1115(a)(1) (property of bankruptcy estate includes “all property of the kind specified in section 541 that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a chase under chapter 7, 12, or 13, whichever occurs first”); 11 U.S.C. § 541(a)(1) (bankruptcy estate includes “all legal or equitable interests of the debtor in property as of the commencement of the [bankruptcy] case”); Cole v. Pulley, 18 Mass. App. Ct. 950, 951 (1984) (rescript) (for purposes of § 541(a)(1), “property” includes “all interests of the debtor in rights of action” (quoting 4 Collier, Bankruptcy par. 541.10[1] (1983)).
As noted above, however, Hannon’s counterclaims and third-party claims are based in large part upon alleged acts or omissions by McLaughlin and his companies that occurred after Hannon’s bankruptcy case was converted to a Chapter 7 proceeding.
As a result, Hannon’s claims in this action were never part of his bankruptcy estate, and therefore could not be and were not released by the bankruptcy trustee.
2. Claims against Tri County. Hannon asserts two claims against Tri County. He alleges that Tri County would be unjustly enriched if Hannon is forced to pay any amount under the limited guaranty. In addition, Hannon claims that Tri County is liable under the note as a successor in interest to Recycling and Ware, and that Hannon has been harmed by Tri County’s alleged “plundering” of the assets of Recycling and Ware. The Court understands this to be a common law claim for indemnification on the theory that Tri County is legally obligated to repay the note to Holdings, and that if it does not do so and as a result Hannon is liable under his personal guaranty then he is entitled to full indemnification from Tri County.2 It does
2 “A person who, in whole or in part, has discharged a duty which is owed by him but which as between himself and another should have been discharged by the other, is entitled to indemnity from the other, unless the payor is barred by the wrongful nature of his conduct.” Suffolk Const. Co. v. Benchmark Mech. Sys., Inc., 475 Mass.
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not matter that Hannon labels this claim as one for “successor liability” rather than a claim for indemnification.3
When one corporation acquires the assets of another, “the liabilities of a selling predecessor corporation are not imposed upon the successor corporation which purchases its assets, unless (1) the successor expressly or impliedly assumes liability of the predecessor, (2) the transaction is a de facto merger or consolidation, (3) the successor is a mere continuation of the predecessor, or (4) the transaction is a fraudulent effort to avoid liabilities of the predecessor.” Guzman v. MRM/Elgin, 409 Mass. 563, 566 (1991).
The facts alleged by Hannon plausibly suggest that Tri County is liable to pay the amounts owed by Ware and Recycling to Holdings under a “de facto merger” or a “mere continuation” theory of successor liability. See generally Milliken & Co. v. Duro Textiles, LLC, 451 Mass. 547, 557-558 (2008) (summarizing factors characterizing de facto mergers and mere continuations).
As a result, Hannon has stated viable claims that if Tri County fails to pay those amounts, and as a result Hannon is compelled to pay Holdings under his personal guaranty, then Tri County would be unjustly enriched and Hannon would be entitled to restitution and indemnification from Tri County.
The motion to dismiss Patrick J. Hannon’s counterclaims and third-party claims is DENIED.
6 June 2017
Kenneth W. Salinger
Justice of the Superior Court
150, 154 (2016), quoting Santagate v. Tower, 64 Mass. App. Ct. 324, 330 (2005), quoting in turn Restatement of Restitution § 76 (1937).
3 See Gallant v. City of Worcester, 383 Mass. 707, 709 (1981) (complaint may allege facts plausibly suggesting that plaintiff has legally viable claim even if complaint does not name correct legal theory); Republic Floors of New England, Inc. v. Weston Racquet Club, Inc., 25 Mass. App. Ct. 479, 487 (1988) (plaintiff may press at trial any legal theory fairly raised by allegations in complaint, even if that theory is not expressly invoked in the complaint).

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