Document 1
Filed 03/31/2006
Page 1 of 2
IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE ) ) ) ) ) ) ) )
Chapter 11 Case No. 04-10324 (KJC) Jointly Administered Related Docket Nos: 2064, 2066
IN RE GARDEN RIDGE CORPORATION, et al., Debtors.
NOTICE OF APPEAL Daniel Ferguson ("Ferguson"), by and through his undersigned counsel, Buchanan Ingersoll PC, hereby appeals under 28 U.S.C. § 158(a)(1) from the Court's Judgment, entered February 14, 2006 [D.I. 2066], and the Memorandum of Opinion and Order relating thereto, entered on February 14, 2006 [D.I. 2064]. The names of the parties to the Judgment and Memorandum, and the names and addresses of their respective counsel, are: Via Hand-Delivery David M. Klauder, Esq. Office of the United States Trustee 844 King Street, Suite 2313, Lockbox 35 Wilmington, DE 119801 Tel: 302-573-6491 Representing U.S. Trustee Representing the Debtor Via Hand Delivery David M. Fournier, Esq. David B. Stratton, Esq. Pepper Hamilton LLP Hercules Plaza, Suite 5100 1313 Market Street Wilmington, DE 19899-1709 Tel: (302) 777-6584 Representing Official Committee of Unsecured Creditors Via Hand Delivery Joseph M. Barry, Esq. Young, Conaway, Stargatt & Taylor The Brandywine Building, 17th Floor 1000 West Street Wilmington, DE 19801 Tel: 302-571-6600
Case 1:06-cv-00213-GMS
Document 1
Filed 03/31/2006
Page 2 of 2
Dated: February 20, 2006 Wilmington, DE
BUCHANAN INGERSOLL PC /s/ William Sullivan___________ William D. Sullivan (No. 2820) The Nemours Building 1007 North Orange Street, Suite 1110 Wilmington, Delaware 19801 Tel: (302) 428-5500 Fax: (302) 428-3996 Counsel for Daniel Ferguson
2
Case 1:06-cv-00213-GMS
Document 1-2
Filed 03/31/2006
Page 1 of 1
I N 'I'III? LINI'TED S'I'ATES BANKRIJP'17C:V C"OtIRT IIIS'TlI1C'T OF' DEI,AWARE
In He: In Ikoeeedings Under Chapter I I
(;AICDEN IU1)GF: CORPORATION, cl a. !,
Case No.: 04-10324
I(t E N 1 l lM
In ilelanare, in said ilistriet, on t h i s a day of February, 2006.
A Rllc~norandurnOf Opinion And Order lisving been I-cndcred by this Court in this
-a
13' IS IT'WERI
motion for relief fron~ t a j in order to effectuate a setoff is not well premised and is hereby s
denieci. Each party is to Blear i t s rerpectirre costs,
17' IS SO ORDERED.
RANDOLIYT-11BAX'I'l
IJNITED STATES BANKRIJITTG YJliJIIGF,
Case 1:06-cv-00213-GMS
Document 1-3
Filed 03/31/2006
Page 1 of 22
IIIN T 1C: IINITICII STATES BANK ItUPTCV COIJRT 1I i 1)ISTRIC:'F OF UELA\F7riRE
(;ARDEN RlDG 15 CIClRIWOI
Case No.: 04-10324
I3cli)re t l ~ c Court is tile motion of IJaniel 17erguson('"erguson'')
Ikr reliel'fron~the
automatie stay ul~der 362(d) ol'rlle linitcd States T3;inkruq)lcy Code to the oxtent ~iecessary 8 to
tiel olTcertain anounts
o ~ i n from arsct owed to tllc Uel2tors.' g
157(;1), (b) and 1334(b). Ill~on er;ulrrilrzition ol'111cparties' respective bricfs and supporting ;in
doeu~mcntation, aster conductir~g iIrearing 011 the matter. the E'ollo\vli~g and ; filldil~gs offact and conclusions of law arc. Ilcrehy rctidcred:
*
(Jarden Ridge C:orporatiorr a~ld joilltly administered affiliate co-dcbtol.s ([he its
""lebrors'') operate home decor retailers wit11 35 stores i ~ 13 slates Illrougl.lout the So~rtll. r
Midjvest. and Mid-Atlantic rcgiolls oftire 17nircd Stales. Crarclen Ridgc h/fanagemcnt,Tnc,
(.T;RMw)is a rni~~~age!nenl scrvices company tlinl e~nploys of 1116 st;lfl'ilild managelnc~~t rrll
utiliyed at tile (;asden Ridge stores. Gardl.11Ridge,
],.I< (("YiRL.P"), erllity that operates all of thc
Garclen liidge, 1 ,.I<., (irardcn 12idge C'orl3ol-ahon, Cjarclen Ridge h4anagcmcnt. Inc.. (;;irtlcn fiiclge P:in~urccC'orporafion, Gardcu Ridgc Tl1\es6tnents, Irre., ancl (ial.den Holdjl~gs, Inc. (collccti\lcly, thc ""lebtors" o r tllc "Reorganized I1ebtor.c"').
'
Case 1:06-cv-00213-GMS
Document 1-3
Filed 03/31/2006
Page 2 of 22
tlrc Gasdcn Ridge store:;, pays GKM ;r fec for thc use 0l"GRM.s cn~ployecs i t s stores, CKM in
Ilolds n one percent (lD,b) general partnvrsllip interest in CiKLP? with the renlnining 99% bcil~g
held hy (iardcn Ridge Investl~~cnts, , . he
On Janunrj128,2001. [:erguson executed a11 ecr~lploylnent ilgreerrlent (the '2Blnployment
Ag~.eemcnt")rvlierc.l?y Ire Ivas to become a ~nernher ol"G;vdc~i Ridge's I-xectrtivc Coml~littec as
the Senior Vice P r ~ s i d c i - Sup~)Iy ~t ('l~ain."~'I~c I~mploymcnt Agrecmi~nt provideiil that E the n
cvellt tllat he was rclcaseil witl~ou~ cause, ITergilsonwould receive orre ycar of base salary. "T1-lc Agscelncnt also provided for tlrc pajment ofcestain reloci~lioncosts (il~cluding L I S ~ O I Ireal ~ C I~
eslalc conar?ilissionsup Lo 6% n~iiximum011 the sale of 1-erg~~son" se?sling house) in con.junclion
jvizh F c r g u s o ~Inove rn I ~ O L I S I ~ I I . ~'~
On January 3 I , 200.3, drre to a dcluy in the sale. ofhis Ilouse in Michigan, Fergusol2
exec~xlccl promissory noic in favor of Cil
(11) tcr111in;ltion of sale ol'Fcrguson's real property in Micl~igan, the clatc of Fcrg~lsor~'?;
cmploynsent (wii.11 or w i i h o ~ eil~lse),l ~ l d(iii) t i Ilecelnbcr 3 1, 2003. S i ~ ~ I;crgur;on's I~ouse ce
remaincct uissold, ~lae Note wi~s reneivecl u ~ ~ n u r i l l y lhis time, it is u~ldisp~lft'd the full litce At. that
an~ourlt the Note remains due. of I'erguson wis ~crmlnlrteclon Seplc~nber 13,2003. 'I'he 13articsdisagree on wl~etl~cr 1:erguson's Icrrnir~alion was f i ~ cause. lierguson has irlitiatcd a $3 10,000 eausc of action against r
CiRM and (iR1,F"in slaw court in Texas
he "State ('oull Action")
sceking payment of'$25O,OOO
' Exhibit A to Ilchtors' (^)l.,jection. ' Exhibit C_' lo Debtors' 0hjectiol.l.
Case 1:06-cv-00213-GMS
Document 1-3
Filed 03/31/2006
Page 3 of 22
in severance pay (comprisillg ollc year ut'base salarj), alld $60,000 in unpaid relocation essts."
O n I+cbr-uaql2.2004, the rlebtc~rs filed for prolecliaii under ellapier I I ofthe Bar~kruptcy
Ckodc. 'l'hc schodulzs filed by (7RM (thc ""CillM Sctr~dules")~ ~ c l u d e d unliquidatccl clail~l i~ an of
Iderguson related to 111c State Court Action. No accounts reeelvnblc fro111Ferguson were listed on
llie (;RMSelledulcs. Dccause (il
schedules lilcd by CiKI,l~(Ikc "GR1.,I~~clicdules")" included ; unliiluidated claim ol' also m E:crguson, 'The C"ItI,P Sclled~iles listed Ihe Note payable fr'i-o~n Ferguson,
On April 16. 2004, I:cl-gtiso~lfilcd an ~mcec~~red, noii-priority claim in the atr~clurlt crf
$3 10,000 (the "-C'P;~im").'
r .
I Ilc consoliicli-rtcilchapter I 1 plan oi'(iRM and CiI(I,I"(Ilre "'Phan"'). ;+longwith the otller
Garclcn RicPge entities, was co~~tirrned March ?9,21105.~ on
14ergusonilssells
111111 llic
a1130~111 01'$350,0C)O owed by Fcrguson 10 GllLP 017 the Note
slio~~ltl sctoll'by the amor~nt be ol'$3 10,000 oived Ily the Debtors to I:erguson fir severance fees
and varit~us unp:~itl relocation costs. I:erg~~soll argues that tlre net result would place him 111 thc
posilion o f an unsecurecl cretlitor for the $00,000 dcficiel~cy outstanding.
* I
"A creditor who Iras tlrc right lo setotYmuy obtain rclicf Ikons the uulom:die stay in order
Exhibit I) to Debtors' Oljcctio~a.
< I :xlrihit 1 ' t o I)cl,tors' O l ~ . i c c ~ i c ~ n .
"xl~ihit
1' 10 Debtors' 012jeetion
k:xhihit ('r to I)el,lor.s^C)I)jectic>n.
".xlril?il
10 to I)cbtors' Iqost T Iclrring Memorandum.
1
3
Case 1:06-cv-00213-GMS
Document 1-3
Filed 03/31/2006
Page 4 of 22
to ilnplelnent the selofi:" i n rc Ol,,lc, 2003 I V L 2740503, "7(Baulcr. h4.l). N.(" 2004); /rz re
LCfirrlc.r., H.1Z. 360. 362 il3nnkr. I). N.J. 2002) (""TI nrdcr to exercise u valict right of setoff. LI 285
creditor 111~1st lnove li)r rclief l i c m Ihc aoromatiu qtay under 1 I 17.S.(-'. 6 162(~1)."),"Ilc right of setof[ (also c;llYed koTset ') allows cr~tities ocvc eacli otlier money to apply their mtlrual dct~ts that
against e:lel~othcr, [hereby asoicling 'the absurdit1 of making A pay R wlacll B owes A,' Altl~ougl~ federal rigllt o f setof'is ercated by 111c I3;1nlkruptcy Code. I 1 1I.S.cI. $ 553(;1) no
jxovldes rhnt, wit11 certain excsplions, ~vbalever sigl~t ofsctoffolherwise exists is prcscrved in
har~hr.uptcy." I 'itinons ljctrlk ofiWtn:i~lnj~d ,Y/vunlpf: 5 16 li.S, 16. 18 (1 995). Section 553(a) v.
rl~is docs r ~ o affect any right ol'a crecBitor to offset a rrlut~lal ti~le t debt owing by such creditor to the debtor that arose bcli~re comrnence~nent llre crl'tl~eease under rlris title agaitlst a elaim of sue11 creclitor agairrst tlic ciiel?tol.that arose before the eommelreenrenl ol'tlle ease . . .
1 I U.S.C1. $ 553(rr). ""l'lre hurtle11ol' proof' is or1 the party asserting the rig111 to set-off." E.g.. Ilr
rcl I,ir,~;on, 3 14 I3.R. 290, 305 (13anhr. 13. I>cI. 200.5): 111 re HC)PIIEC// /ylc.., IGt~lillit~q Gro~i,~), 2 13 /PIC\
13.K. 206. 2 12 (U.A,P. 2nd C'ir. 1997). Whetl~er allow selofi'is a dctcn~iinatio~~ l l ~ e to within
souncl discretion of this ("otnt. E g , In rri ( 'ontinorrflxli.lirli/zes.2 1 S 13.R. -324, 328 (I). Ilcl. 1 907')
(citing I jnilec?l S1~1tca.5, II~I(J~)ICIII ~ ~ ~ ~ zvI ,Rll)r/ol~,1~ I ~ ~ 767,c773 (3d Clir. 1 1183)); In K~J ( ~ Y ~ * 7 1:.2d ~ + 7
re I1,41,, lr~c., B.R. 150,161 (13.A.1" 9th C'ir. 1906) ('WWhellllcr or not to allow setoff pursuant 190
to tj 553 is le l l o the sound discretion of lllc banknil7tcy e o ~ ~ t . "l' n;IT I1angej-f.226 R.R. 892, i )
OO? (Banhr-. D. Mont. I C)98).
'I'o cnfol-ce cr ~~'tolr'right, crcditorI mu4 eslnblisll tlrul ( I ) it I ~ a s right of setoff ullder ."la n
nonl>nr~ltruplc)/p and (2) this right sho~llii preserved in banl,rul~tcj.under $ 553." In\\: be
l f 1 re
Case 1:06-cv-00213-GMS
Document 1-3
Filed 03/31/2006
Page 5 of 22
/1,4/,, lnc.. 1936 R.Ti. a6 16 1 ; / / r r ~ d ~ r c r n ~ r c c ~ ~ ~ , 1 1.3, 1 17 (1). N.J. 1 W")8 ("Courls Inay I t ~ o l c 221 J3.R.
to state lau in order to determine ivhcther a selofrhrts crccurred, I~owevcr, granlilrg or denial the
of the right to a setcalrdcpel~ds upon Ihc tcrrns o f section 553, and not uj7on the terms o f slate
strrtufesor laws."):
ro 7krhrrck. 3 18 13,1<,78, 8 I (Ijankr. lV.1). Pa. 2004) ("The thresholtl
cluestion in every case in~lolving asscrted right ofscrolris thc source irnd validity of the lrrl trntlerlying riglit."').
'1'0 iietenrrinc whicll state's law to q1'1?1y. C'ourt turi~s0 IScla~vare 111e 1 choice of'Iaw rr1lt.s.
K g ,112 I"C IWP l J ~ ~ i ~ l t h ~ ' a r c <138~eL1. 'Appx, 830, 84-3 (3d 6'ir. 2005): 12 1°C b:ilgIe . ( ' ~ I' ~ j , 1
I":1l/ev/7rici>,r, In(:.,223
B.R. 202 (I3anlcr. E.1) 190.
I'a. 19%) (citing KIc~xond'o v. ,Y/L)II?/oP
I
I;rw rules ofthc fi~r~in? sfatc."). ' I l ~ Nore include<;a elloice of law provisioti stating Illat i t is c
governed by 'I'cxas l;iw. Fcrg~sorl'saction is a breach of contracl chin1 brought 111Texlis stale
court. atrd arising from an empltayrnerlt agrce~l-rcnr executed and pcrforrnccl in Texas. 'I'herefbre, tllc Court ttlrns to 'l'cxas
LO dc[~"rmille whelllcr
17ergiisonhas a light to sctol't'. ,Gee ChcntQ~ol
I,td
\I
,SIit,1-l7czsrN~llritiorlrrlI"'oori~ l!(,rlcl*r~.. 750 1:. Supp. 2d 582, 595 (D. Z~rc., Del. 20C)4)
('Y Jncler I.)clawnrc [choice of Iitw rulccl, express choice of law provisions in contracts are
gencrnlb given eflkct.'"): ,24tr/lipr.of'l)c~rnrer LYl~)ol ('llrtirlg (-'o., /I?(" . 1 17 l3.lt. 103, 107 (nankr, D. I k l , 1090) ("Irn cases soundir~g contr.act. Ilela~are's in conflicts of law 1711~s require application
ol'Ae law of'the stiltc writ11 the
IIIOS~ siglliPIL~allt contucts.").
Therefcjrc. i t is clear, and ulldisptrted
by the 1x11-ties, 'I'esas laws of sctoffal>plies. that
Undcr I-exas law:
Case 1:06-cv-00213-GMS
Document 1-3
Filed 03/31/2006
Page 6 of 22
Setoff is a ii~rm cclir itable co1111 of t crclai~n urhickl brillgs together oblig;~lionsof parlies oppoGil~g each other and, I9y judicial ;rctinn, rnakcs each ohligiilion e?;tinguisl~ other. 'i'l~e the ob,jcct of ecluitahle setoff is to ad-iust the demands between the p;jrrics ;tr~d;~llow recoirerp of only the balance thal is due. In orclcr a foi one dc1n:ind lo I-jc set off against another, b(>thdemands rli~~sf ~nutually exist between tlne same pm-lies. Illdeed, sctoff'is proper o111y \vl~erc dema~~cls are 11111ttia1, between Ihc sarne prrrlics, and in tllc same capacity or right.
( 'rrl?iilal( ' O M L ' ( ~ I / , S P~O~ICYII'CS 8.5-1 V , hfllillill Fir,\'/
IIIL".. 3.5 F.3d 1 70,1 75 (5 th C'ir. 1 994)
(citations omitled). Similarly, ""sctisn 553(a) recogni~es preserves rights of setofl'm711ere and
foi~lcor~ditio~ls ( I ) 'l'hc creditor holds a 'claim' against thc dcbtor that arose helbre the exist:
comnlencelnent of'thc easc; (2) '1 11e creditor oc\;e4;a 'clcbt' to thc clcbtor {hat also arnsc behre rllc con~nlcncen~ent the ciise; (3) 'The clainl and debt are "mutual" ;ant1 (4) '1-he claim and debt arc of
each v;lliil and enli,l-ceahle." Sec. t2 g=, 3 Collier- on Banltruptcy 1 553.01 11 1; III re C'qlzk, 29'7 1
I1.K. 4C)(i. 409 (BanPx. 11, N.J. 2003): 113 t-c APF ( b.. 264 13.R. 344. 354 (13anhr. 13. Ilel. 2001 ).
'Pile cffcct of setoff is to clcvate ''i111 unsecured elaim to secured slalris, to the exten( tllal
thc clchloi. has a mulu:il, pre-pefilio~l cl;ijnl
ilgajnht
the crcciitor." I ec v iC;clll~leik~r. 1:.2d 870, 739
875 (3d C'ir. 19884); l ~ rc lj~>nl/li r !\4(1~rcxgc>nrc~n/ P~lt.tncrsl?i/), R.IZ, 360. 363-64 (I3anl;r. id!(/ 332
'T'he first two eletnenls of sctoffa~.e ~rllcol~testcd this ease. Both debts arose ]?rein
petition. 'Ihc parties I ~ a ~ f e agrced to sep;~rately also bricland argue the validity and cnhrcenbililj~
of tllc l+ergusoncl;iim ar a separate ti~nia." 'I'herelijrc, the issuc to he dctcrmincd by the C'oul-t at
this 1i111e i h WIIC~IICI. L : ~ " I - ~ I J s o ~ 1 ~ 1 s ]?isburclear of showing by a 17repondcrancc of the evidence, niel
that (IIC Note to (;RI,P am! rhe stirtc courl action against C;ItI,T?and
C;I?M are ""nl~itual'"Tor thc
"
1)ebtorsq Objection, at 8 n.3.
Case 1:06-cv-00213-GMS
Document 1-3
Filed 03/31/2006
Page 7 of 22
plrposes of Texas law and $ 553.
***A
"I ~o establish its right lo s e l o f f ~ r ~ ~Section 553 of the I$rmlir~rptcy der C'ode, the creditor
must sl~ow rnulualily of'obligarion. /n r.c, Win.v/~xl* C'onzn/r~~riclc~tio~z,r,I3.R. 4160. (762-(13 (1). 3 15 Ilcl. 2004)."Mtx!r~alilyof obligations is deter~l~j~leclstate law." 11rr ('zyrk. 297 713.K. a 409. by 1 t
1 int1t.r 'l'cxas and feder~lllaw. "I~rnlutualityol'oblkautjon exists wlren delm are oisirlg between the
same lxarties 111 the salnc rig111 or capacity,'" K g , . ,hlitllcvi 1). Chcuillcxm, 1900 WI, 10959 17, " 3
('l'ex. App. 1900); IJrooir Alu~tcOyqlr~?o , Iuc. v So/iii(?ck, 1 S.M'.2d 160, 166 (?'ex. Civ. C' 55
App. 10'77): In r p I/t?lson, 69 T3.R. (160, 905 (Ilanhr. N.1). Tcx. 1987); seti rrl.50 h re ItYrultzr 1
( "c>~~lrn~~nr"~'~alion,s~ 662-63: 3 15 1-3.R. ar
lz r.c (;PI\" Iloltlirzgs, L I,. C,', 2004 WI. 3007080, *4 u
(J3ar-rlir.N.D. 'l'cx. 2004). "For muttralitj to exis[, erreh party must owir Iris claim in his own right severally, with the right to collcct ilr his own namc :lgai~rst debtor i n his own right and thc
heverallp." Brsl~[fl,/lirt~*~~j:\, Iixxoll lt7c, r7,
1 ~ 1 4 7 i 1 1 0 1 A~o/III'.v. -
('0,
I
'.,(lLl.,
814 F.2J 1030. 1036 (51h C'ir. 1987): 1~
60 13.R. 700, 763 (Billllir. I). Nev, j 080) ('LMuluiilityor tlle dcbt. arid clallll
me;ms that the crc~jitor indebted to tlre debtor w l ~ o 1s lil\c\i~ise owes a cieht to the crcditor . . ,."I.
For setoffpiirposcs, t l ~ e mutt~ality recluircincnt is strictly construed. E g g , rcJBenuzell I:lli?di/;q
C;roiq?,I~IIc.,312 H.R. a1 21 2:
1.c ('lenlo/~,~, R.R. 602, 606 (Ilankr. M.11, Pa. 2001 ). 261
A ~r.iangular sctolroceurs where ""A atlcrrrpts to offct an obligation iwed by I3 against H's debt to ('. SetoriB of this kincl ai-c not pcrrnltked ilnder sectio~l 553." Ivj
1.e
KZK Livc>s/oc.k,
lnc, , '921 I3.K. 471, 480 (Banla-, C'.T). 111. 1998); Ilr rc /%4L.. Inca.. 196 13.R- at 163 (""?'he general
rule. ho~tever, holtls that t~.i;lngular sclork ar?long related parties clo riot ~ncct imurualit!the
rccluircmenf."): In lzl7(!
/lorolecxrur. I F I ~ 327 B.K. 8";. ..
864 (Ba~ilir. S.1). Ohio 2005)
Case 1:06-cv-00213-GMS
Document 1-3
Filed 03/31/2006
Page 8 of 22
("Tot~seq~lc~llly. a 7rii;ing~llar setctCf:' betwec1.1tuo parties.").
,
. . is prol~lbitcclbecause tl~ere no mutuality of debt is
' w uxeeptions have been recognized to the principle t11at triangular setofls lack. the To
requisite mutuality for setoff, Pirsl.
G O ~ ~ K~I S L held ~ V C
that setoffs involving separate
governnlental agencies may satisyy tile ~nutunlityrecluirerncnt t~rrder5 55.3. K.g, rci li;lJ,s fnc., !IT
196 I3.R. at 163;
r p Brlllcr).
rc
r !,Y
,4clroletxi.11, . 327 13 R. ztL lvrc
864 13.9 (citing /31t/lcr v littifed , Y ~ L J ~ L ~ S (hz
10W1 lVI, 33403850 (Har~l\r. S.f). Ga. I F ) j ) C (('"l'his easc C!(DCS 1101 recll~irc court to ) the
adclrcss triangular xctol'C5 iuvolvirlg sepmate g o v c ~ n m c agcncich. Iltlilcr cerfaitl circu1nsla~1ccs, ~~t
Illese types of triangular setoffs lmve bcci"sul1owcd."); III rc Nllcblt.cn Itk~(~gi~zgA s / ~ luc., ,260 i~v ~~w ~,
13.R.ar 733-34 (citirag ('llc?rr:1~ ('o//o,r ilfillv I ? lJizi/~*11',Y/ales, 536 ( I 040)) (""['l'll~e 327 IJ.S. vast
rnajority ofcoirrls II;IY~ collcludecl, izritllin the c o ~ ~ l i no s a brrr-tkrl~ptey cf case. that all ilgcncies o r the lJrlited States eonstilutc u sirlgls kuni tnry erecl tor" for ptirposes of selo ff rlrlder section 553 .")).
The SC"C)I"CB
exceptiol~ that a11 express t~greemellt is hctweer~ related enlilies may created the
lf1
mutuali t j for setoff purj~oses,k'.,.g.,
t.\ Acrotccrnr, Irjcs., 327 13 .R. 865 ('"C:encrally, i,: at
courts' are in cigreernent tlr:lt a11 nssignnnent of rights can create nsutuality for sctoff purposes.").
***.xi*
Fcrguscln argues
Illat
~ n u ~ u ; r l i csists in this ease, si~lce ) F'erg~~son ty I alleges that Ilc was
elnploycd hy Ciartlen Ridge, eollcctively, and not :;olcly by 012h4. as ullegecl by thc Debtors; 2)
that CiIiiRAil and CiR1.P wcre. for practical ptuposcs, a single entity. a l ~ d Il~e 3) scveml entities of
(iarclcn Ridge \\cr-c consolidatctl into a singlc entity, the Reorgairiyed Z>cbtor, tlisougl~ f'1;in. llze
I'irrally, f:ergi~sonargues that even iSn triaigul~~r :;el-off cxisted, these eireu~nstanees within a fall
recogrlizecl exception pcrmitling setof[; sirlee the parties liitendecl (Irat the obligario~~s the Note of
Case 1:06-cv-00213-GMS
Document 1-3
Filed 03/31/2006
Page 9 of 22
to GIII.I"voulJ cornpens;rre (iIih4 f i r i-nal\ing the I,oarl.
'I'l-re T)ebrors, ho\.vcver. argue t l ~ t r tthe cleb~s not mutual, asserting this situation arc l~reser~ts impermissible ""tiangul;~sctoff:" since Ferguso11was employed by CRM, ;md thc an
nolc was yrayablc to GRI,13". Alter~lativcly, Ileblors nrgtie lhal I'ergl1~01-r, a fidrleiary oi'lhe the ;LS
I>cblors. c:lnnot eflket~~trtttselsfl~ a
I,
Identity o f Fergnscrn% E111ployer
'I'hc parties disprite whctller C'rRM was /;erguson's employer, or ~ h e t h e Fcrguson was r
employed colleelively lry itre v;lrious erltities oT(1t~rdcnliidgc. including GRI,lis
'I'lre I)ebtors ai.gue
the rcquisitc i n u ~ ~ ~ , d does not exist, since I-'erguson was jt?
elnldloyccl by GRM.and the nore \\as payable to (;I21 !I
The Ilchtors rely 17rinlarily on
I'erguson'r; pajzctlecks and W-2 I:or~r?,whicl-r clearly slide Ihnt ""Cwrden fiidge M~n~agmnunt. Inc."
was I - ' c " ~ ~ I ~ s o ~ I 'e~iy~loyer.1e parties s 7'1 prior ro filing, distinct legal e~ltilies. 1:ergtrson argues that despite rl~e Illat <;KM zrppearoci or? the pt~yellecks W-2 alld
(10 not
dispute that GRM ancl GRT,P were. at ;ill tirncs
I;orm, GTIM's payroll ncco~ml entir~clyf~lndecl controlled by CiR1,I'. Ferguson also notes was and
tililt
(iKT,P was the ci~tity respo~ssible severance obligations of ihe Clcbtrrrs. 1:erguson notes Tbr
t17at tIhc Ilr~~ploylnerat Agrcemclll relkrs only to "Gardct~Ridge," anti mal\cs no mention ofG1IM.
or airy specilic entity oi'll~c Ijcbrors. I;crguson calTcrs his own tesfimorly that he was tlna\vare of
tlrc spccilic entit) tlrat was his tnlc cnll~loyer..Filuully, col3t~.rn~7c~ranec)t1~1ythe Note. witJi
I;crg~isollrcueived a letter w111cll stales:
Cboll(emporaneouslywith the cxecutiol~ this leiter. you art. executing the Note. of
Case 1:06-cv-00213-GMS
Document 1-3
Filed 03/31/2006
Page 10 of 22
a 1T Garderr Ridge, 1,,1" (the "'Con~pany")is making f ~ lo:an to you evidenced hy 1c c the Note. You currer2tly are scrving as an employee ol'tlle Coliip;iny. , , .
1331:
Garden Ridge Maliage~nent, Tnc., General Eballner"'
I ; e r g u ~ o ~sarguinents on this poht are misguided. I:crguson's s{lt!jeclivc belief, Iiowcver ~%
uell lbur~cfcd, does ~ l o oLJercolnellrc legal eonclusio~~ the debts are not mutnal. For l th:rl
inclel3enclerll reasons. (ir~l-dell Ridge ereatc~i n~aint;~inctl ancj CiRM and (iKl,ls as distinct legal
entities. According to Iris paycllcoks and h i s W-2 tax fonll. Fcrg~ison pttic., and \.\as fc3mallp was
c~nl~loyed. (IRM.The assert ion h a t CIRLP controlled the pttyroll acco~ir~t not change bjdoes
lllis
legal slatus. 1;crgtrson cannot crccltc the rccluircd mutuality by naming GIU,I) as a, dcfcnclant
in Ihe Stati: C'ourt Action. despilc the lilct tlral his cause of action arose frorn his employment by
(iRn.1.
Ir is scttlcrl law tlmr a Iriangular sc~offexists even wl-tei-e the ptlrlic>sarc. related
subsidinries. 1
I"r(lii J . ' / ~ ~ C ~ J J ~590C ~ Y . ~S
I:.2cl 377. 379 (1st C'ir. 1W79))(""l is ivcll establisl~cd h a ~ subsidii~ry t tone 111tij- not setolra debt
owecl to a banlcrupl against a debt o\\ii~~g the banhnrpt to anorl~er Ii.01i-1 subsidiary."); I~rland L\'lcel
C'o
1'
/jtlr.g,ler, 1327 1'.2d
401 (7th Cqir.1'164) (""Tli:, arglnnent appea1.s lo bc sul,portcd by those
cases wl-riell I~olcl11111t a parcr~t corporatiotr rnay not sct-offa dcbl owed its subsidiary b) an enlit)
Case 1:06-cv-00213-GMS
Document 1-3
Filed 03/31/2006
Page 11 of 22
~rgainsl tlcbt 1 o ~ c to the salne entity."); In rc ,"icrrtir?el J?*oc/lici~. 3 1 s (:or.p.. 192 R.R. 46 (N.D. 41.
N.Y. 900) (oiling -4l:V(- ( 'ornn~orcli~ul v. ,/casc/~l~ l<-vcr,son "GPIZ,11li".882 F.2d 615. 61 8 1 Cfcil;ll 1: re ,
n.2 (3J C'ir. 198%: 1111l7e Mlr/tcr of Llconrt /Iorrrc.,r Plcly~silo/-'~r I 'o 7i.zrst
nf,d~lg~isltr F'tauli I*
803 F.2d 483, h656-87 (7th Cir. 1988);
lG12ers..590 1'.2d a1 37") (("'asubsidiary's debt Itlay not
be setoll"ag;~inst credit of zi pilrel~for cltl~er the stthasidi:try, or vice versa, because n o mutuality
exists rrndcr ~lre eircirm.;tarlccs."), 1 1re KZK Livc~5focli. , 22 1 13.R. 480 ('"'l'hus, t\vo 1 In(*. at
en~iticb, cn ifl.clatecl, may not aggrcgatc tllcir debts and cl;lliuls for setol*i-'pui.poscs.For e\ cxnnlplc, a subsidlalayrrmy not offset a tlcbt to tllc det~tor against a dcht the debtor oucs l o
anotI~cr related strlssidiary.s*-"); r t ) Ijcrjcr Rorr~,.1jtc.. 1997 11'1, 81 1694, *7 (Bankr. N.D. Ohio Ir!
1097) ("'1 Ilc l?rin~;iry recluirzrncnl of rn~rtnality illat the relevant elailn and clcbt tglllst exist is
Ixlivcc.11( 1 7 ~ :same partics. Tl~wclijre, enli tics, c~.c'l-i related. mily not aggregate their debts two if
P+I
and c;lalnls fi)r setof"fI-iurposes."): 1.l
/Iil/ Pelrolcznnl Co.. R.K. 404, 1 1-1 2 (P3anl;r. W,Zl. 95 4
La. 1988) (ei ting 4 C'Ol
1,rl:li O u I ' l r ~ ~ # l i l 1 1 ~ ' 1 ' ~ \ . 553.0412 1 al "
3
553- 1 C) ( 19888)); Afirtfer of
i~rr.s~rno,/l~~xrri~s~c 43 13.R. 864. 870 (f3aiilir. M1,l>.Mich. 1084) (eitatioras on~itted) IVic CTo., (""'l'l~e
sanlc rulc applirs ~villl parel~t u corj9oratic)n and
;I tvllolly
owrlcd stibsidi;lry. Since an
intercorptrratc relationsl~ip i~~sul'ficicnt meet 1Jre rnuti~alityrcquirel~scnt an ofinsi\ie clai~rl is io in ofsctoll'by ;a 111eluhe1 the corporate h l ~ i l aganrlsl ; third pliriy, i t likcwise is insuflicicnt to at j I
nwet ~ h ~nutuality c require men^ in a third party
c l ~ ~ i ofl setollr'agninsl n
;z tncnllacr of the eolporale
lamily."): la) rcl I/il-ginicr Blo~.k ' o , I0 H.R. 560. ,562 (13anl;s. W.D. \'a, 1981) ('7~urthermore. ( a
corpo~ilion may
11~1 setofltl~c right
of'an associuicd, \n.liolly owned eori,trration, cvcn though
local euslcbrn perrnils s~rch setolr:"). a
'1 his prineiplr: h;rs also I~ccn applietf in sitllatior~sillvolvlrlg p;irl~iel-sn partnerships. ,C(.:c i
Case 1:06-cv-00213-GMS
Document 1-3
Filed 03/31/2006
Page 12 of 22
( 'txfil'l~l 'oncc/~l,r ( Proy7cqu1rii~v I 1. 85-
,4/)//~1itl I;'~TsI, , 3 5 T;.3cJ 1 700, 75 (5111(-'i r, 1 094) (findi tlg /PI(*. 1
tlrat the ""pcmisc that tlrc debt owecl to il ~?artne~.stlip cretlitar j may IPC set ofl'against the claim
of ulr indi~ridual partner
I I again51 tl~e pnrtncrsl~ip crcclilor docs not finci a n j clear s ~ ~ p p ointthe r
cii.cic1c.d casts.'"); In rc .N~lc*lorrr I\ncr:lilz,q ,~y,vIen~,c ~ 1 ~ I3.R. 724, 73:1 (13alikr. E.D. Pa. 2000) 1 200
.
(citing C;r.clv v Rollo. 85 1I.S. 118 WtiI1.1 029 (1 873)) (tnutuality fbr purposes 01'setoffis abserlt
when a ~2rn.tuership a claim against ;ln individual but the individual has n claim agarillst a has
partrlcr of 1116 paT111crsl1ip); re 1 ~ ~ ~ 90 H.K. ~ 1711(13ankr. W.1). N.C. 1987) (""'This is 1r1 ~ ~ 1 ~ 168, ~ / , consistcnl with othcr ;it~tl.iorities whicl~ have ii)und 110 111uti~aljty situations in13olving jlarent in corj7orations :rt~cls~rhsidiaries, sistcr corporations, and partnersllips and i~rdiviclunlpartnsrs.""):ln
1.i.
I/l"qqir~ii/ Illock
('0
. I0 L3.K. 211562 ("Strict col~l;tructionof h e elernent ofn~utualiry nlcans tllal
a debt dtrc. an individu;il pnrti~cr c;lr~nolkt. setofr;~gai~~st '1 claim of 11repun-lnership.'").
13ris case docs not present a pernlissiblc triimgular setoff'I7ased upon an ;~grce~nent
ketwcen I ~ Lrclatrd entities. Alllrougll l.crguson ,Il-guestllirr the note to (ilif ,P was intended to '
clircelly. or. indirectly, henelit CiRM, he has not alleged tlrat m y forrnal or exprcss clgrcelnenl bet\wen (iItR4 arid (;;ICI,P exis(cd, llq~o,silo,:rfizrsl (Jo ofL41~,qmvllr 15-crfiR~~tcr~~i~i,sc's, v. ~I~IC..
590 F.2d a1 379 ("Thus. althougl~ T3angc.br ;lnd Augusta are basically the same biilnli, wc C;IIIIIO~
Ireat them as such, 11-1 11-1~ absence of ;IIIagreement by thc banknip[ to treat the two hanks as one."); If7 YC Ilill Pclfroli~r/,~r , 05 W.R. (^\,
at
412 (b"l'henarrow cxccplion to the rule agrthlsl three
[many. ""Li~lngulitr"'sctofIs, occlirs wllcrc there is a li3rmal agreelncllt by tlic dcblor thaf two
cntitics mily aggregate debts owed to and Iio1-n Ll~udebtor."); Jrl
IT
I A I Y ~ ~ , V7L 1 10420. "5 1988
(13ankr. W.D. Pa. 1088); I n
IT
B(~ltIl/cc11 1 ( ' 0 . 0
1116"
. -33 t3.K. 847. 853 (I3ankr. D. Colo. 1983)
(cita~ions omitted) ("II'II~ courts h n \ ti)n~zclt~iuli~ality ~ betbvcen thr-cc parlics, a:; a matter of
Case 1:06-cv-00213-GMS
Document 1-3
Filed 03/31/2006
Page 13 of 22
eonllxct law, where thcre was (111cxprcss contrac~n;ilagreement clearly evincing the intent of 111e plkrties to iretit the parent and subsidiarj~ one e~~tity,'.). as 'rl~crefore,the fhrmal legal relaiionsl~ip "utwcen the parties herein preserrts an impel-missihle tkungt~l;il.scloff; as Ihc rccl~rired n~ut~lirlity ofthe parties docs not exist. '1-0 thc cxter~tt1m1 17crgusor~ riri?ucsIllat the entitic5 opentted as n rirlgle entity, and tliereli~re should be considerecl to hc as the same enlily for seloffprlrj~oscs, such argu~nents addressed below, are
2.
Whether C; I ;rnd CIKL,P Sllould Re Treated 21s Clne Errti@ IXM
I:el-gusotl srgiles that Garden Itidge, as n collective unil, ol~eratedin a Inullier such that
C'ourt should disregard Bzc fitct tliirt ORM alid CiIt1,lhwe reeparatc: legal e~itities.7'cxas lakv providcs that in several broad Inst;inccs, the eor~~c~rate rnay he disregardecl, including "1 entity
wlien the corporalloll is the ;11tcr ego o l ' i i ~ owner? or shareholtlers; 2 ) u lien the eorl3oration is
')
usecl Ihr illegal pul-poscs; and 3) nhcn ~ E I G eorpor;ltio~i t~seclas a sham to pe~.pctrate fraud. is a
"
('ir, 1994) (citing C'illlxr- v. ( kori I(:y hl(~r.i/i/,ir~ "XI 17.2cl 1489, 1496 (5th Gir. 1993)). ( 'orp.,
Anrong thc rcasons reeogni~cd tlle past for disl-egarcli~lg corporate ficliolz in the are: (I ) kvhen it i s L I S C ~ a 111e:lrls ofj?crpetr;tlil~gti.;~ud: (2) [vheri: a ~ o r ~ ~ o m ~ i o ~ i CIS is organized ancl opelaled as n 1ncr.e tool or business eorldliil of another eorpcxl-atiorr;(3) w11cre it is uscd to evade an existing lcgal ohlipation; (4) vtllere i t is ernploycd TOachieve or perpetrate a nlor~opoly;( 5 ) wllerc it is used to cir.cuni\,cnt ri statute; and (6) whcrc thc colporatc fiction is relied upon as a ~~otlcellon ol-crime or to juslilj/ wrong.
'Ibe purpose of disreg:u.ding Ilre corporate cr~liEy tlicse jrrslanccs is to IIrevent tiaud. in
Case 1:06-cv-00213-GMS
Document 1-3
Filed 03/31/2006
Page 14 of 22
illeg;rlily, or lo avoid an oll.ler\wise iinecj~~iti~ble rchult. ,Gv, c g . (;y)i/crl l%~rk.r, v. lnc.
,Tol/llrclcr,i/crn rfth~orlisi~lg ~n~iJ.Ytrl(>s ,~v.slem~, , 30 F.3d at 630 ('"TI1e purpose of tiisregarcling /r~c
thc corporate f i c l i o i ~ to prcvcnt the corporation's owners li-0111usjrig t i ~ c is c~)rporate entity as a
cloak Tor ihud or illcgirli ty."'); Cfrx~fil.\orz h/If
the purpose ol'the single business e~iterprisc theory. libe [lie alter cgo tl~cory other doetrines and
dcsigll~d pierce the corl,r,rale veil, is to pr~\~errt ineqnitahlc result."); ,Y.\'P Ptrrincr,v v 10 an
(;lrrdr/ron,qlrzve,~lmctllc' 1'4/;\:1) (,Tory,. 2005 W1, 10937hF. " 1 ('Tcx. App. 2005)(""f-~.xas
recogl~i/esthe -single btlsil~css enterprise ~ i o e t r i ~ ~prevent an enlily fior~i to c ~ relying tipor) eorlmrate 1i)nl-rto evade an existi~lg ilebt or legal c~lsligalion.");(io/(islc"1'17 1,. /\4or/e17.\ot~,13 1
S.W.3d 769, 7t(O (Tex. App. 2003) (""U1c disregaj.tl the corporate fiction, even rllougll corporate
fi~rnialities have bccil obser\,ccl and ccrrporntc and indivjdual 17roperty ha\ e I,c.cn kept separately,
whcn 11re eorporafe fi)rln has been used as part or'a basically unlhir clevice to achieve ail
ineqnitahlc result.'"). 'I'herefore, the corporate entity \\'ill not be disregartled u~iless tl~ere arc
co~npclling reasons lo do so. h'i~c, cg., I ~ L I P ~ C Lv" LROSC"OI>, I ,SH~Y(~L>C* Ry. ( '(1 . 385 I:.Supp. (6 I'IIC.
455,46 1 (N.D. 'T'cs 1973) (quoting RuOeroid ( 'o v. Norltl 7i.s. I \orzcrc~le( '(1.. 193 F.2d 121. 122
(5111 C i r . 1952))(""I llc cloctrine ol'sepur;ltc enlily fill5 ;I usefill purl,ose i n busir~css and the lii'e
courts are l ~ e s i t a to~disregarii i~ rrnlcss t l ~ c ~ t facts ],resented demonstrate some misuse ~ l ' t l l e corporate. privilcgc o r the ilced ol"lir~lltingi t in or~ler do jiisticc."): C7cn?c~l1tos ('hil~rrtxlrmn. to do
,SA. tkc ( ' I: v Itilc~rnrc~citrl i%les ( ' o q 7
/,?IC'LII
17
. 102 S.M1,3d581, 585-80 ('l'ex. App. 2005) (quoting
374 (l7i=.r;. 1984)) (''di,srcg;rt-d oTtElc 'legal fiction
?~?.T(IY ~ ~ d l i ~ % I ~ '090~ $ , l l~i~lc i ~ S.\h7.9d 372, .,
ol'cor-por.:ttc entity' is - a l l exception to tlie geilernl rule \d~ichli~rhids clisr-cgxding corporate
e~istcnce. ( "txrlsclnhj& , Inc. v. iYi;~ill?, '7: 2005 M'L 2878033, "3 ('.l3eeause 'T'cxas law presumes
Case 1:06-cv-00213-GMS
Document 1-3
Filed 03/31/2006
Page 15 of 22
lh;~ttwo separate corporc~tionl; distinct cutitics. tllc court^ will not disregard arc
the separate: legal
idellrities ol'ccrrporatic,ns i~nless relatiol~shipis usecl to clefeat piiblic cont'cnienee. Lo justify [hat
wroriss ~ i ~ c l l\~iolatic)~~ anti-trt1.4~ as of the laws, to protccf fraud. or to dercnd cn'me.'); Tj
/'01"11/~r, S.N7.3d375,302 ('fex. I'iv. App. 1978) ("l'he gerlcral rulc prolribits dis~~egard t l ~ e 580 of
corporate entity by a court unless thal corporate clltity is used as a inearls ofcc>mmitti~rg fraud or
to justify
I\ rong 113
Ihe sel~se f i~ violation ol'law or of pclblic pol i~,y,"")Aring v. T7i/hh, 1 o 55
S.U'.2d 436, 435 (Tex. Civ. A I ? ~1">77] (""As a general rule, the corporalo entity will 11otbe .
disrtgtirdetl u11less there are sonly~clling rcasons Ir, disrcyizrd."). 'T'exas corirts have becn particriltlrly hesitrznt lo clis~cg:rrdthe cor-por;~te cn~ity cases illvolvirlg contracts. hf~~krc~c~q), in hlc v ('~ilj,e/7j?~r, X 8 b.W.2~1 (347-48l ex. App. 1992)("[Tjlie ovCl.ridingptilslie policy . 844, d Ilecel;sirrjrto clisregard t l ~ e corL)or;rleentity must be nlcrre strillgent in cc9ntr;ict eases than ill tort cnscs I~ecausen eonlrncl case\ Llle plnintiffl~as opj>orlirniiyto select [he entitj wilh which he i an
clcals as opl~osed tort cases in ivhiiclr rio sl~ch to elroicc exists . . ..
11-1 s~fclr ;I
situation, a c o w
shoul~l resort to tlie drastic cxceptio~~ the geni'ral rule tllat tlle corporae elltity must remain not lo
il?viol:l(c.").
I"euusl i l w places rhc brlrclen of showing that the Court should disregarci the corporate fietion 011 the party seeking to treril the entities as a singlc unit. /?g., I'flC1-hfi/zd~~~i,ly. 12.11.
Kin.rhe~.lv-('/ark td70rp , 2005 WI, I079102, *:4 (Tex. App. 2005) ("'il'l~e party seeking to ascribe
IC ' entitics must prove one corporajion's :rction\ to ~ ~ I I O ~ ~by Idisregarding tlielr distinct corpor~rte
tllrb
;lllcgatioll.''); JYor'/l~c~nl I)o\i' ('licunic-trbC'o . 2005 WI, 2786FX, "4 ('lex. App. 2005); I*
M(ulc~ol.p, I K I
v C~~l/?c~/.l;;r)c~~, a~. ( I'llc "'burden of proof is on ~ l l e 836 S.W.2d 837 plaintiff to prove
harm
it7
ostler to pic'rcc llie corporalc veil.'").
Case 1:06-cv-00213-GMS
Document 1-3
Filed 03/31/2006
Page 16 of 22
I:erg~~son presents pcrsuasivc evidence to show that the Ikebtors' operations overlapped suhst;u~tiallq.'l'hls ( " o ~ ~founcl 1hLI1 sticll cvidence was sul-ricienl lo s h o ~ the rjebtors' cases rl tl~ar
sl~oul be ssrbstantively consolidated. staling: J
I11 tlie Marti11 Ilcclaratio~~, hlartin atfested l o the li)llo?ving hcts, wl~icl~ not were controvertc~l tile ('o~sfirrnntior~ ;it Ilearing*(11) tile I)ebtor~ shares cclmmon n?;i~lagcmcnt, the Ilcbtors preparc and disser~~in;lrc (b) co~lsolidatedfinancial reports, (e) the Ilebtors lile consoliciated fcdernl tax returjrs, (dl the Jlcbtors utilize ccntrali;.cct cash nlanagcnlclbt syctc~n. (c) eacll of'11~e and Jlebrors, other illan (7arden I loldiugs. lr~c,, a co-obligor ~lncJer Dcbtors3re-ipetition \vorlciny was the caliitnl I'acilrry a ~ r d IIIlVreclit 1':icilitj. Based orr the Martin Ilcclaration. tlre [he I'oiirt llnds Ihat tllcrc is a substantiul idenlily and inseparable rel;itionship between the Ilebtors and 1lln1 t l ~ e hcnclifs olconsolidation oulweigll any I1am1or prqjildiee to creditcjrs."'
'
'The Ilcbtors do riot izrguc that s~lcll cvidence untiisprrtedly establistles that tlrere i~;ls suhstrmtial
identity ;111C1 inscpart~ble rclationshil? hetv een CiRM and (;Rf,P. 111 order Ibr the Court ttr
disregard Ihc scparutely nsaintai~lcd corporate entities, Ilcrwe\rcr, Ferguson must still shojv that the Ilelntors mlsusecl thc corl~orale privilege, or that if ~vouldhe necessary to avoid an inequitable
soirsetlling Inore Ihan mere ~rr~ity offinarlcial inlcrest. ownershil? a ~ ~c011tr01 r il COLII? to treat the subsidiirry as the alter ego ofthe piirer11 ancl cl b nl;~liethe p;lre~ltliable for ~hc" t ~ h ~ i c l actions. Merely sllowing a blending of s li~'~ ;rctivitics bcriccen the parent anti subsidiary. sl~eh they tnaq Llave had sorne or that a11 of'tl~c same directors or officers. filed consolid;~tedincorne lax returns. sharecl the sanlc corpor;lte logo, conducled i~rter-corporatebusiness. or- ofliced in the sii~me building, i s not l-lloriesufficient to rnahe the parerrt liahlc.
. . . 'l'his was not sufficier~t show that 11161 1?are1if/s~ibsldll1~y to relationship hacl bec~rused 3s pnrf of a basically ~uilhir device 10 achieve an ineclrriiable result, 01. that llre subsidiaries iliiere orgt~ni~ed opwatad ;is mere tools or busi~less and conduits of the parent.
7inrli.r/llln, Im..
31 ('1~li.L.
[ ~ ' [ ~ I ~ T T cbe nlrlst
794 S.Bi.2d 479. 489-90 (1ex. App. 1900): iz.lor./Lq~'qc.t d '/kzts/, Ii~c ix
Case 1:06-cv-00213-GMS
Document 1-3
Filed 03/31/2006
Page 17 of 22
I301'1nvr
(.'a,XIIC.. 572 S.!17.2d 334. 348-49 ( 1 ex. Civ. App. 1W8) (""As :igcrner;rl rule., t h o or
nnorc eorpc,ratiolis are scparntc and clistillct legal cnlitics, md ille sepilmrc. ideiitiiy ofeael~ ~vill
nor be c1isreg;trcleci in older to impose Ilalaility on one col-por;ltion for the acts of ;unotliur
corporation ~ncrely hccaiisc oC: a ) overlnppillg stock ownership; b) a dup1ic;ltiotl of some or all of the direc~ors officers: or c) an excreise of the control illat stock 0~11ers11ip i \ . i ~ or g tc1 stocklloltlers.").
To Illc cxtenl lh:lt l~crguson at-guts 111ai (;KMis llie "dtcr ego'kof (;]?I +IJ. Ferguson has
not allcgcxi 01;1t the 1)ehtors maintained (;I3361 and (;121,151s separzlte ci~rities f"raudu1etit fix
purposes. I lndcr 'l'cxas law, the alter ego docirine reqtrires a sl~owiing liaud. iVor*/ll of' /Imericbrrn
1'6111
Lili~c?,rInc. v E Y I / ~ J I50 Y ~ ~ , 103, 1 I C) ( ~ C X App. 2001) ('"l'l-jllr: "alter ego' theory O S,W..?d .
generally involves proof of fraucl, i.e., proof"that rhe corporalion is organized ancl operated us
n~erely tool or ~ I I S ~ I ~ C S S a eonduit of'anollrer corporation. At a nlinin~um, '[tlhc ~ ~ l a i n t i f f ' l ~ ~ i ~ s t 17rv~e hc h ~ .filleln victim to cr basically tirifilir c1~"vice wllich ltllc s~lbsidiilrylhas been that s by rrl;ed to irctlieve an inequilablc rcs~~lt."~));cll,ro In re ( 'crrrorl.rclil/lotcl,\, 112~".1 60 R.K. 993, Aec ,
1002 (Banfir. S.1). Ohio 1993)
('v 1lhe alter ego tlocfrine by its rlalure ciiocs not admit of
n~utuality:the dockine m;1y not be trscd as ;I shielil. 'l'lint is, one may 1701 disregard corporatilcncss
~1111ess ha5 bee11rnis~lse fhcri: oSco~*porarcrs~ss.");rc9Belltmt:a L4ir
398-09 (ISankr. I), Minn. 1985) ('''Il'l~u\,as n ~natcer ol'corpora~e law, willlnul alleging Iiaud or
somc orher \vro~~g, L3c.tc;owill not be alloncd to clisrcgartf i-'inion's eorpor;iteness lo cst:rblish
miltrriility of obligrrtion.").
Al!csn:~lively,T:ergusc)ii argucs that GRM and GI
Ihercfikrc should be treated as such for secofl'purposes.
"
"l'exas recognizes thc 'single business
Case 1:06-cv-00213-GMS
Document 1-3
Filed 03/31/2006
Page 18 of 22
cnterj?rise tioctri~lc'to j~rcve~lt ei~tit!~ iln fi.orn rcI4 ing uj~on corpomlc form to evade an csisting
I:;iclors to be cc~nsiclerctlin cJetea.mining vvllclller separate corgsorations showlcl be treated as one entcrprisc. include: ( I ) colnrnol~ ejnployccs; ( ) cornmoll ollices; ( 3 ) 2 ce~rtrali~cd nccoul~ting; paynlent of wtiger; by one corporation to anotlrer (4) corpuration%eemployecs; ( 5 ) cornillon business nallle; (6) services rentlcred hy t l ~ e e~iijdloyees ol'one corporaliolr on behalfofanotlier corporaion; (7) undoeurnelitcd rra~lsdrs fu11ds bcrwce~l 01' corporiltions: and (8) uncletu. allocation of profits and losses between corporations. . . .
Although Ferguson offerb ~bvidence lllc close relationship I,etwcen (3RM and Glil I" of
I \
11icl-nmay warrant ajJl7lication of thesc dt,ctriiics i n ollicr ccanlexts, lie Iras not shown that t l ~ e
corjsorrltc e ~ ~ l islloulcl he clicrc.ga~.tlcd s e t o ~ i ~ j ~ ~ ~ r l s'Pl~es . ty Ibr o s c slilglt" business c~ltcrprise theory, and orher an;llogous doc~rines, llnve hecn e~~forccci 'Texas courts to i l l ~ l c tlint a nliistcr servant hy l relatioaship cxistccl for thc purposes ol'i~~lposing Iialrility, or h r piaposcs o f d e t c r m i l ~ i ~ ~ g
2878033. *3; ,tre~:r~,c~l)c>r.s, 17. l , o ~ ~380 S.W. 2d 583, 590 ('i'cx. lW(r4). l'llere is no appxcnt lnc. c. ~ s oP'fl~c c doctril~c create ~n~du;iljly setoff purposes, :u~dsuch a use docs 1701 fix11 within tile 10 Sbr recog~~ircd ci~tcgoricsn wl~iel-r i 'l'exas courts Iiave determined that the corporate entity should bc disregarded. Suck1 a use woultl hc inri~?prop~.iate tlris case, since denying setoll'would rrot in
allow citlrcr party to ev;lcle an csisting legal oklig;ztioll or alter tlie legal riglrts ol'the p;~rties,nor
does I:crgu:;crn allegc that rile I1cblo1-s m ~ c h crcatc-ai separate legal entity lor 1i.wudulrnt o r
~ ~ r o n p fpurposes. .YPP //? rc I ~ * h iEl~s,rler~qing' o i y ) . 521 1;.2d 186. i"0-C) I (0~11 ul n ( Cir. 1975) ("Il'he I
Case 1:06-cv-00213-GMS
Document 1-3
Filed 03/31/2006
Page 19 of 22
the same pelson, 111e two corporations 'were at all relevant tinles scparnic leg;ll enlilies.' JEerlec,
the debls are 11ot ' n ~ u t u ~ rand 1may not be clffket agrtinct each other."); Itr rc I;irir:fieM Pluittcxlion. l'
1 1 2 ~147 f3.R. 946, 954-55 (Hankr. li.D, Ark. 1902) (".In ligl~l 111crthsencc ofe-iridence that . of
rllis C'ourt. applqing (jeorgiil law, iirlcls tl~al 1'A(.' Iiax a separate co~.pomtc idcrltity from ~ l ~of t a
I*PI. Accordingly. fl~e par11 ;~gairlslwhich I)LI-,C;1has a claim (1;131) is diAkre11t li-orn l l ~ c p2irty lo
wl~ielr1"l:C;I owes ; tlcbr (FA(') ancl muttrality does rrot csist."). In this case, I2erguson could I
maintain lrjis state ctrurl action. and his Icgal rights wo[.~ld be crll-rcrwiscitl'fcctcd. not
r'hcrefi)rc, Ferguson has not projridecl a .y~crsu:isivehiisis to s l ~ o ~ l l the C:ourt should rlliat igllorc the fact that (jKM and Glil,lQare tlistirlct 1cgd entilies.
3.
SuX~slantivc Cornsolidation to Create Mutualif!
1:crguson argues hat the subslanri\,c consolictation of illc I)el?tors ere;ited the necessary
mutuality, Thc 1'l:ur stcrles,
Notl-lingconrni11cc8in this t'lxn or- tllc ( ' o ~ ~ l i r n r a ~ (11-dcrshall be dccmcd a ion waivcr or relir~qt~ishmcid any f'lainr, (:;ursc c:,FAclion. rlglri of sctnfT, or other of leg;zl or cquiti~ble defense that t l ~ c 1)ebtor~~ ilnmediately prior to thc Ikrstition Ilail r l i ~that is not specilically waivcd or relincluished by this I'lltln.'' t~
Thc I'l:at~ ;tiso stales that
O n the (:or~lirin;rtionllatc, thc Cl~apter I C'ases of all or the Ilchtors sllall be I suf)stanlively cc~nsotidatedIbr all purpose:; related lo the ["an, imcluclir-rg.witl~oi~t Ii~nitatiinn. purposes ofvoting, c o ~ ~ f i r m ~ ~ t i o ~ ~ . Ibr irntl distributions. , . .
Such subst;~ntive co~lsolictation shall not (othcr than for pul-poscs related to the
I'llan) al"fccl (i) the legal and eorl~crrate str-~ictur-c ofthe Reorgani~ed 13elstors . . . . I 3
Case 1:06-cv-00213-GMS
Document 1-3
Filed 03/31/2006
Page 20 of 22
'T'hc lanyuirge of t l ~ c IYlall slates ~Erat 1Jie rjcblors rctai~~cd cleknses that they I~elcl rtll prior to the Iktiriola dtitc. Ferguson does not s~1gge:itthat llie (YrRM
irllcl
CiRIJ13entities were col~soliilated
prior to the time of the subject transtlctiv~~s. There is no Ianguagc: in the Plan whiet~ woulcl si~ggcst substantive eonsolid:~tionshould be given retroaetivc cffect. "The substantive Ihat
consc~lid;~tion several estc-tlcs Incans one thing ancl onc thillg orrly-t11rlt all assets of the scvcral of
e17titiesare pooled rrncl all credit~rs 01't11~ C V C ~ entities are erltitlect ~ c slsarc in tllo pooled assets S ~I~ t
in acconl with tl~eirrespective rigl~ts.XI ~tould certairlly bc n viol,iriolr of due 1,rocess if the ortier
of huhslantivc consoliclalio~.would operatc ro dcstroy defer~ses righls \\illich existed prior to ancl
Illc
e11tl-y(sf [lie order ~ f s l ~ h ~ t i ~ l t i \ ? ~ col~rolidatior~." / rc A4r,j*/-qv /I ;I,lcizzr,\lvic~,\, lnc:., 125 R.R. 3 14.
I.(,
3 17 (13;lnl;r. M.I). 1;Ia. 1 ! l ) : El) Irl
( 7 ( ~ 1 " 2 / ~ 1 EIoc?rollic~ :~~
h& , Inc*. 3 l o i3.R. 485.493 (13ankr. T I . f ,
Mass. 2004) (""norcover the 1)efendant"s argument that the conlir-m~ltion ordcr provides for rctro;lcti\,c sukstantive constrlidation is incorrect. 7'hc Iarrguage is ft3rw;rrd-looking. It was
intendecl f i r ease of adlt~inislralic>n, as an spporlunity for the Ueikndant lo enlarge its new not
\7alue defense rtfer the 12ict. It would be ul.ll'air to burden lllc cor-rsnlidacd estate with
/l,ncatrl?j?licafiovr tlmi
; nllillx 1
pro
was not colltempllrted \vl1en the C'onfirmalion Clrder cutered."). As st;ltecl in
the !)12n1, suhstan~ivt: consolidation was Tor cert;rirl prospecli\rc L3urposes related to the Plan. One of tl~osc pwlxoses was r?ot to create rni1lu;llily so Ihat T+ergil?;on could c11.ioy Ille belle!?ts o f betc31'f.
1%
I:in;~lly, llle I>ebiorsargtre illat since I'erprson was arl cxec~~tive Garden Iiidge, he was of
sllb.ject to cer-tail1ficlt~ciarj. tluties, ancl is ~hereli~rc* burrecl from scek'll~go cffectutlte a seloff. t
Altlrough it is r~ot nccessnl-y, as 17crgusonhas rallcd to meel the ~nulualily rrircmenl of setoff. rey
Case 1:06-cv-00213-GMS
Document 1-3
Filed 03/31/2006
Page 21 of 22
Il-iis arguinent ol'llle 1)cbtors i ~ not applical7lc in {his instance. ;
'1 IQjhere a dcbt arises fro111 a
fiduciary cl~rty is in llic n ~ ~ t uo ca Irust, coLrrti; ha1.e held that tllere i s no mutuality Lbr setoff or rf
17m.posw";. . . In otlxr W C I T ~ S . seli~ff will
110t
he ptwnirtecl wIlrre gr;lntiiig it would have tlre effect
of cscusirrg or cvadirlg the [fid~ieiiryI 01)ligation." In rc Lriz /n!err?., l,/li,21 9 13.11, 837, 848
(I{.i\.T!
9th Cir. 1008) (citations omirled); I/? rcJ T/&/ori~/:1~~c.~~.c,r., l4.R. 062, 685 (Ranlir. lnr , 324
N.D. 111. 2005) (citing I.il~hji1 Ifoj1kir7s. I04 1I.S. 303 (1881)) ("'\Vhcre [he liability of one .;
claiming u set-of right arises li-on1 a fiduciary diidy or is in f l ~ c nature of ;i trust, the recluisite
~nutualily debts and claims docs no[ exist, and r;ucli pcrsons 131214' no1 set-ol-ra debt owing fiorn of the clcbtor against sttch Iiability ."I;
111 I . ( ,
'liri.hlir~k. 304 13.R. at 72 1 (""lor ~nutuallty exist, the to
debts musr exist betwecl~ same p;irtics i n the sirme capacity. i.c., each must owe the other ill fl~e
hrs O ~ V J Inanie and not as 8 ficji~ci;iry."). ""1 he ralia3nale of this rule is silnply that 11.16liability arisirrg liom a iicluciary dilly is e~~tirely ir~dcpendentofthe dcbt owing tieo~mthe t~ankrupt."'
Tl'clsrrnr
L)c.trlcl.
hl~r/?n~qcnrt
1-
I:'M,qlnll(i,(111 re i*io(l I<~CII(ITLLY ('111:)1,\lrr Pljv~~~oulh CTorl.?.j,
473 I'2d 262, 265 (Otll C'ir. 1073). l'hc fC1ct one ol'll-re17artic.sha:; a fiducia~y thzil duty in soine context, J~rnvever, does not
necessarily prccludc mutuality. h~rc / < iRocm ( 'o , I~Ec".. I3.K 270, 287 (L3a11kr. 1. Idallcr ~ 287 ) 2002) (eitillg 5 CO! LII:K
O ~~.$~\'KRIJI~TT"~' U 5.53
llf
03L.3][hj and 553.03[311c][ii])("the cx-islcnce
of'a fiduciacr relationship neetl not ~ w e v emutuiilily"). ~~t
A distinction !nust be dramn hetween
diff'crcnt types a~l'Ildtici;iyreI;~tionsl~ip~,, i~-ruti~ali~y bc Soutlcl ifsetc>rfwould not "l~irst. tnijy
viol,ltc the fitluciary obligation in questio~i, in the case o f ccrtain typcs ol'securi~ydeposits. ;is
Second, rl~uru;rlit\~ c\; isr il'tllc. 1"" xx"'r may 7") ii-rg
t l i t b
right of st"lolT1s 1101 tlre one acting as a
liduciary. 'I'hirsl, tire rille does nu1 ~ ? r c ~ ~ c n t setoff'~l'theobligatioi~s sought lo be oflker betnreen
Case 1:06-cv-00213-GMS
Document 1-3
Filed 03/31/2006
Page 22 of 22
the parties are unrelatutl lo either party's fiduci;~~-y responsibilities.'" 5 C'ol ,r,rt:ii OV BANI
In this casu, thc: Note did not arise out of E;erguson's ficluciary tLu~y. Although 1:erguson
received a loan irr ecl~j~~nction h i s moving expenses, it was not i11c.ur.recl as an exercise crl'his with
f?cltlciaiycluties. 'I'lle fiicl. alone, ~ l i Fcrguson was in a position ehiirgctl witis certain fjiduciar)i a~
duties clocs 1101 l)i>r ha11 hi111 l'Ton1 asserting an! righl to setoff. \e
Accordinplj, I-.erguson's ]notion f i r relicffior~~ in ordt.1-to effectuate a sstorf is not stay well premised ancl is hcreb\/ dtmiud. 'Each party is to [?eari t s respective costs.
IT 1S SO OIII)EREI),
Ilated, this @ d:l) of .. I'e bruarj .2006.
4
Case 1:06-cv-00213-GMS
Document 1-4
Filed 03/31/2006
Page 1 of 2
UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE
Clerk of the Court 824 Market Street Wilmington DE 19801 (302) 252-2900 Date: March 31, 2006 To: Peter Dalleo, Clerk U. S. District Court, District of Delaware U. S. Courthouse - 844 King Street Wilmington DE 19801 Garden Ridge Corporation et al Case No. 04-10324 (KJC) AP-06-25 Enclosed please find the bankruptcy Record on Appeal # AP-06-25.
Re:
Sincerely,
D avid Bird, C lerk
By: _/s/ Ken Brown___ Deputy Clerk X Filing fee paid on 2/20/06 _____ Filing fee not paid
NOTE: As of 3/31/06 Appellee has filed no designations.
Case 1:06-cv-00213-GMS
Document 1-4
Filed 03/31/2006
Page 2 of 2
TRANSMITTAL SHEET FOR APPEAL SUBMITTED TO U.S. DISTRICT COURT Case Number: 04-10324 (KJC) Deputy Clerk Transferring Case: Kenneth Brown 302 252 2900 x5126 Case Type: Appeal - AP-06-25
Order, Date Entered and Issues Order Denying Motion for Relief from Stay (related document(s) 2064 ) Order Signed on 2/10/2006. (DKP, ) (Entered: 02/14/2006)
Debtors: Counsel:
Telephone:
Garden Ridge Corporation Joseph M Barry , Esq. Young Conaway Stargatt & Taylor LLP The Brandywine Bldg 17 Fl 1000 West St Wilmington, DE 19899 (302) 571 6600
Appellant(s): Daniel Ferguson Counsel: William Sullivan, Esq Buchanan Ingersoll PC The Nemours Bldg 1007 North Orange St Suite 1110 Wilmington, DE 19801 Telephone: (302) 428 5500 Appellee: Counsel: Garden Ridge Corporation Joseph M Barry , Esq. Young Conaway Stargatt & Taylor LLP The Brandywine Bldg 17 Fl 1000 West St Wilmington, DE 19899 (302) 571 6600
Telephone:
United States Free Forms
Canada Free Forms
United Kingdom Free Forms
Australia Free Forms