Kit Pack Co. v. Friedman et al

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
KIT PACK CO.,
Debtor. 	No. 11-08-10206 TL
KIT PACK CO.,
Plaintiff and
Counterdefendant,
v. 	Adv. No. 08-1031 T
GERALD M. FRIEDMAN,
THE MARVIN GROUP, INC.,
MARVIN LAND SYSTEMS, INC.,
MARVIN ENGINEERING CO., INC., and
LAPEER INDUSTRIES,
Defendants,
Counterplaintiffs, and
Third Party Plaintiffs,
v.
KIT PACK CO., KPC INC., and
DOUGLAS BAILEY,
Third Party Defendants.
MEMORANDUM OPINION ON DEFENDANTS’ MOTION FOR SUMMARY
JUDGMENT
This adversary proceeding is the result of a failed business relationship between the
Plaintiff and Gerald Friedman. Friedman purchased assets from Plaintiff in 1999, pursuant to a
plan of reorganization confirmed in Plaintiff’s prior bankruptcy case. 	In spite of the purchase,
Plaintiff retained the assets and continued using them, with Friedman’s oral consent. 	The
Case 08-01031-t Doc 135 Filed 11/09/12 Entered 11/09/12 13:27:58 Page 1 of 14

-2-
undocumented relationship eventually soured, Plaintiff filed this bankruptcy case and adversary
proceeding, and the Court must now determine the legal rights and liabilities of the parties.
In the adversary proceeding Plaintiff sued Friedman and his affiliates for turnover,
declaratory judgment, breach of contract, and ten other claims. 	The defendants filed six
counterclaims for money damages and other relief. The amount in controversy is in the range of
$2,000,000.
Movants/defendants1 filed their Joint Motion for Summary Judgment on November 24,
2009, doc. 88 (the “Motion”). 	Plaintiff responded January 5, 2010, doc. 104 (the “Response”),
and Movants replied January 21, 2010, doc. 122 (“Reply”).2
This adversary proceeding includes core and non-core matters. The Court has considered
the briefs and supporting papers of the parties, and has made an independent inquiry into
applicable case law. 	Being sufficiently advised, the Court hereby issues the following
Memorandum Opinion. For the reasons set forth below, the Motion is denied.
I. 	FACTS
The Court has gleaned the following facts3 from the briefs and documents submitted by
the parties:
Plaintiff is in the business of, inter alia, manufacturing and providing overhaul kits to the
United States Department of Defense.4
1 Movants are all of the defendants, i.e. Friedman, Marvin Engineering Co., Inc. (“Marvin Engineering”), Marvin
Land Systems, Inc., the Marvin Group, Inc. (together, the “Friedman Group”), and Lapeer Industries (“Lapeer”).
2 Movants asserted 94 alleged material undisputed facts, and supported the Motion and Reply with about 210 pages
of affidavits, deposition testimony, and documents. Plaintiffs and third party defendants’ responses are supported by
an additional 280 pages of deposition testimony, affidavits, and documents.
3 This recitation of the facts is for the purpose of explaining the decision to deny the Motion, and is limited to the
current record. Although allowed to do so by F.R.Civ.P. 56(g), the Court is not ruling that any of the facts set forth
above have been established in this adversary proceeding.
Case 08-01031-t Doc 135 Filed 11/09/12 Entered 11/09/12 13:27:58 Page 2 of 14

-3-
Friedman is the Chairman and CEO of Marvin Engineering and owns 44.4% of its stock.
Marvin Engineering owns 100% of the stock of Marvin Land Systems, Inc.5 The Marvin Group,
Inc. is not a separate entity.6 Lapeer is an indirect affiliate of Friedman. 7
Plaintiff filed another Chapter 11 case in 1996, and confirmed a plan in 1999.8 Under the
plan, Plaintiff sold certain “Assets”9 to Friedman.10
Despite the sale to Friedman, Plaintiff continued to use the Assets without interruption,
with Friedman’s knowledge and agreement (at least until the relationship broke down in 2007).11
Plaintiff and/or its owners, Douglas and Edward Bailey, had an oral agreement with
Friedman that, if Plaintiff and/or the Baileys paid Friedman about $453,000, plus 10% interest,
Plaintiff or the Baileys would be given a 30% interest in the Assets and/or a new corporation that
would own the Assets.12 In the Motion the $453,000 is described as the “Original Investment
Loan,” but Friedman testified that neither the Baileys nor Plaintiff was obligated to pay
Friedman any portion of the $453,000.13 Rather, Friedman characterized the arrangement as an
option to buy back 30% of the Assets. Id.
Part of the loose oral understanding apparently included the possibility of forming KPC,
transferring the Assets to it, and issuing KPC stock to Friedman (70%) and the Baileys (30%),
4 Plaintiff’s First Amended Complaint, doc. 62 (the “Complaint”), ¶10; Friedman Group’s Answer, ¶11.
5 Doc. 88-1, p. 1, ¶¶ 3-4.
6 Doc. 88-1, p. 2, ¶5.
7 Doc. 88-2, p. 10 (Friedman’s and Marvin Gussman’s adult children, through LLCs, own 49% of Lapeer).
8 This Court approved said Second Amended Plan of Reorganization and Second Amended Disclosure Statement by
Order entered in No. 11-96- 15312 ML on July 26, 1999 (the “1999 Confirmation Order”).
9 The “Assets” are described in the 1999 Confirmation Order. Doc. 88-5, p. 8.
10 Friedman and his business partner Marvin Gussman later entered into an agreement which provided for the co-
ownership of the Kit Pack assets and for the division of receipts between Gussman and Friedman. Gussman died in
2008.
11 Doc. 88-1. P. 3, ¶13.
12 Motion, p. 4, ¶15.
13 Doc 109, page 6 (Friedman depo., p. 40); Doc. 88-1, paragraph 9.
Case 08-01031-t Doc 135 Filed 11/09/12 Entered 11/09/12 13:27:58 Page 3 of 14

-4-
when/if the Baileys/Plaintiff paid the $453,000 plus interest.14 Doug Bailey formed KPC on
May 22, 2000.15 Friedman signed the by-laws at about the same time. 16 In 2006 Plaintiff
conveyed the “Real Estate”17 portion of the Assets to KPC. 18
After entry of the 1999 Confirmation Order, Plaintiff and Movants did business together
until 2007. The business dealings included:
-- A 1998 contract with the department of defense, denoted Solicitation No.
SPO480-97-1894 (the “1998 Contract”);19
-- A number of small business set aside contracts, with a total contract price of
about $1,265,000; 20
-- Contracts with International Truck for its “MRAP” project. 	The total contract
price may have been as much as $6,000,000; 21 and
-- A contract with International Truck for reworking certain gun mounts, in an
unspecified amount. 22
As part of the ongoing relationship, Friedman and Gussman loaned money to Plaintiff,
and Plaintiff executed a number of promissory notes payable to the order of Friedman and
Gussman.23
14 Doc. 109, p. 9 (intent was to form a corporation when the Baileys paid off the Original Investment Loan); Doc.
109, p. 14.
15 Doc. 117, p. 20
16 Doc. 121, p. 3. The date Friedman signed the by-laws is uncertain in the current record.
17 The “Real Estate” is a 3.15 acre tract with a street address of 285 E. Thorpe Road, Las Cruces, NM, and a 3.2 acre
tract with a street address of 5486 Dona Ana Road, Las Cruces, NM.
18 Motion, ¶33 (Plaintiff did not dispute the allegation).
19 Doc. 88-1. p. 20.
20 Doc. 88-1. pp. 7-8, ¶¶ 35-39.
21 Doc. 88-1. pp. 9-10, ¶¶ 44-48.
22 Doc. 88-1. p. 10, ¶¶ 49-50.
23 Motion, p. 7; Friedman’s filed proof of claim, no. 43-1. Plaintiff never controverted this allegation.
Case 08-01031-t Doc 135 Filed 11/09/12 Entered 11/09/12 13:27:58 Page 4 of 14

-5-
Several years into the undocumented business relationship, Friedman decided that he no
longer 	wanted 	to 	consummate 	the 	70/30 	business 	ownership 	arrangement 	originally
contemplated by the parties.24 Friedman did not inform Plaintiff or the Baileys of this change of
position.25
There is evidence in the record that for a period of time Friedman and others held
Plaintiff out to third parties as part of the “Marvin Group,”26 that Friedman described the Marvin
Group as “in control” of Plaintiff,27 and that Friedman represented that he was in “partnership”
with the Baileys.28
The relationship apparently ended in the fall of 2007, after International Truck awarded
the MRAP contract to Marvin Engineering Company.29 In October, 2007, an employee of the
Friedman Group visited Plaintiff and suggested that its operations be shut down, all employees
laid off, all inventory, materials, and pending work transferred to the Friedman Group, and all
accounts receivable paid to Friedman and other creditors.30 The Baileys rejected this advice.
II. 	SUMMARY JUDGMENT STANDARDS
Summary 	judgment 	is 	appropriate 	if 	the 	pleadings, 	depositions, 	answers 	to
interrogatories, and admissions on file, together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party is entitled to judgment as a matter
24 Doc. 109, p. 9; doc. 88-1, p. 4.
25 Doc. 109, pp. 14-15.
26 Doc. 117, p. 17; doc. 119, p. 54-56.
27 Id.
28 Doc. 116, p. 19; doc. 119, p. 45.
29 Doc. 88-1, p. 9, ¶45.
Case 08-01031-t Doc 135 Filed 11/09/12 Entered 11/09/12 13:27:58 Page 5 of 14

-6-
of law. Fed.R.Civ.P. 56, made applicable to bankruptcy proceedings by Bankruptcy Rule 7056.
“[A] party seeking summary judgment always bears the initial responsibility of informing the
district court of the basis for its motion, and … [must] demonstrate the absence of a genuine issue of
material fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S. Ct. 2548, 91 L. Ed. 2d (1986).
In determining whether summary judgment should be granted, the Court will view the record in
the light most favorable to the party opposing summary judgment. 	Harris 	v. Beneficial
Oklahoma, Inc. (In re Harris), 209 B.R. 990, 995 (10 th Cir. B.A.P. 1997).
The party opposing a motion for summary judgment must “set forth specific facts
showing that there is a genuine issue for trial as to those dispositive matters for which it carries
the burden of proof.” 	Applied Genetics Int'l, Inc. v. First Affiliated Sec., Inc., 912 F.2d 1238,
1241 (10th Cir.1990). See also Vitkus v. Beatrice Co., 11 F.3d 1535, 1539 (10th Cir.1993) (“the
nonmoving party may not rest on its pleadings but must set forth specific facts showing that there
is a genuine issue for trial as to those dispositive matters for which it carries the burden of
proof.”); Otteson v. United States, 622 F.2d 516, 519 (10th Cir.1980) (once a properly supported
summary judgment motion is made, the opposing party must respond with specific facts showing
the existence of a genuine factual issue to be tried); Lazaron v. Lucas, 386 B.R. 332, 335
(Bankr. D.N.M. 2008) (same).
To deny a motion for summary judgment, genuine factual issues must exist that “can be
resolved only by a finder of fact because they may reasonably be resolved in favor of either
party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S. Ct. 2505, 2512, 91 L. Ed. 2d
202 (1986). A mere “scintilla” of evidence will not avoid summary judgment. Vitkus, 11 F.3d at
30 Doc. 116, pp. 31, 36.
Case 08-01031-t Doc 135 Filed 11/09/12 Entered 11/09/12 13:27:58 Page 6 of 14

-7-
1539. 	Rather, there must be sufficient evidence on which the fact finder could reasonably find
for the nonmoving party. See Anderson, 477 U.S. at 251; Vitkus, 11 F.3d at 1539. “[T]here is no
evidence for trial unless there is sufficient evidence favoring the nonmoving party for a jury to
return a verdict for that party. If the evidence is merely colorable . . . or is not significantly
probative . . . summary judgment may be granted.” Anderson, 477 U.S. at 249. Where a rational
trier of fact, considering the record as a whole, could not find for the non-moving party, there is
no genuine issue for trial. See Matsushita Elec. Indus. Co. Ltd. v. Zenith Radio Corp., 475 U.S.
574, 587, 106 S. Ct. 1348, 89 L. Ed. 2d 538 (1986).
III. 	DISCUSSION
A. 	In General. By the Motion, Movants seek summary judgment in their favor on all
claims and counterclaims. Unhelpfully, the Motion does not address each claim. For example,
the Motion does not specifically address the six counts in the Friedman Group’s counterclaim,
nor Counts I, II, or most of Count III of Plaintiff’s Complaint. The Court therefore will examine
each claim and address whether summary judgment is appropriate, given the current state of the
record.
B. 	Friedman Group’s Counterclaims.
1. 	Specific Performance. Friedman seeks a judgment compelling Plaintiff to
perform its obligations under the 1999 Confirmation Order, including conveyance of the Real
Estate to Friedman. The Court finds that there are fact issues preventing summary judgment on
this claim (and the other claims), including:
a. 	Was there an agreement between the parties about the post-1999
ownership of the Assets?
Case 08-01031-t Doc 135 Filed 11/09/12 Entered 11/09/12 13:27:58 Page 7 of 14

-8-
b. 	If so, what were the terms of the agreement?
c. 	Did 	the 	agreement 	include 	the 	formation 	of 	KPC, 	and 	the
conveyance of the Real Estate to KPC?
d. 	Who were the parties to the agreement? 	The Baileys? 	Plaintiff?
Friedman? 	Gussman? 	How were the parties to conduct business pending performance of the
agreement?
e. 	What effect did Friedman’s alleged transfer of a 50% interest in
the Assets to Gussman have on the agreement? 31
f. 	If the Baileys were parties to the agreement, do they need to be
plaintiffs in this adversary proceeding?
g. 	Did Plaintiff and/or the Baileys perform under the agreement, such
that they were entitled to 30% of the purchased assets, and/or 30% of the KPC stock?
h. 	Upon Gussman’s death in 2008, did his alleged interest revert to
Friedman, go to Gussman’s heirs, or go elsewhere? Do Gussmans’ heirs and/or assigns need to
be parties to this adversary proceeding?
i. 	Is Plaintiff entitled to compensation for the small business set-
aside contracts? If so, in what amount? If not, why not?
j. 	Is Plaintiff entitled to compensation for directing the International
Truck business to the Friedman Group? 	Is that what actually happened? 	If so, how much
compensation? If not, why not?
31 Doc. 88-1, pp. 2-3, ¶8.
Case 08-01031-t Doc 135 Filed 11/09/12 Entered 11/09/12 13:27:58 Page 8 of 14

-9-
k. 	Did Friedman agree to pay off the Mesilla Valley Bank loan? 	Is
so, what damages if any should be awarded to Plaintiff for Friedman’s failure to do so?
l. 	Was Friedman an insider of Plaintiff? 	If so, did the Debtor make
any payments to Friedman within a year of the petition date, and does Friedman have any
defenses to an insider preference claim?
m. 	Did Friedman give Bailey repeated assurances about treating
Plaintiff “fairly” in connection with the contracts the Friedman Group received through
Plaintiff’s efforts? If so, what effect does that have on Plaintiff’s claims?
n. 	Why 	were 	critical 	elements 	of 	the 	relationship 	between 	the
Baileys, Plaintiff, Friedman, Gussman, and/or the Friedman Group ever reduced to writing? 32
o. 	Does Friedman owe $45,000-$50,000 to Plaintiff in connection
with the 1998 Contract?33
p. 	Did Friedman’s relationship with Plaintiff and/or the Baileys,
whatever it was, give rise to Friedman’s fiduciary duties to any of them?
q. 	Did Friedman take any actions or make any statements that would
support Plaintiff’s equitable tolling argument?34
(together, the “Disputed Facts”).
32 It appears Friedman was reluctant to memorialize the agreement relating to the post-1999 relationship in writing,
although Doug Bailey asked him several times to do so. See doc. 88-7, p. 14, doc. 108, p. 4; doc. 119, p. 35; doc.
122-1, p. 5; doc. 123, p. 7. The closest Friedman came was to prepare an unsigned letter dated June 30, 2005,
attempting to set out the 1999 oral agreement. Doc. 119, p. 45. Friedman never signed the letter, although Doug
Bailey signed “in general agreement.” Friedman testified that the unsigned letter was “notes in the meeting.” Doc.
116, p. 18.
33 Doc. 109, p. 7.
34 Response, pp. 22-23, and the record cited therein.
Case 08-01031-t Doc 135 Filed 11/09/12 Entered 11/09/12 13:27:58 Page 9 of 14

-10-
2. 	Breach 	of 	Contract. 	This 	claim 	is 	an 	alternative 	to 	the 	specific
performance claim. 	Because of the Disputed Facts, the Motion is denied with respect to this
claim.
3. 	Declaratory Judgment. 	In this claim Friedman seeks a declaratory
judgment that he owns the Real Estate. The Motion is denied with respect to this claim, in light
of the Disputed Facts.
4. 	Unjust Enrichment. 	Friedman styled this claim unjust enrichment, but
asks the Court to impose a constructive trust on the Real Property. 	For the reasons set forth
above, the Court denies the Motion with respect to this claim.
5. 	Suit on Debt and Account Stated. The Friedman Group asks for a money
judgment against Plaintiff for more than $1,250,000, based on an alleged open account, account
stated, and/or advances made to Plaintiff. 	The Court finds that there are fact issues preventing
entry of summary judgment, namely (i) whether the amount claimed due for the “Original
Investment Loan” is really due;35 and (ii) the extent to which Plaintiff can offset the amount due
with claims of its own. 	With respect to the statute of limitations issue, the Court agrees with
Plaintiff that a party may assert, at a minimum, equitable recoupment with respect to claims
barred by the statute of limitations. See, e.g., City of Carlsbad v. Grace, 126 N.M. 95, 966 P.2d
1178 (Ct. App. 1998). Furthermore, there are genuine fact issues relating to Plaintiff’s equitable
tolling arguments. Response, p. 22. Finally, Mr. Friedman testified that he would pay amounts
he owes Plaintiff, even if the claim is ten years old. Doc. 109, p. 7. This raises a fact issue about
waiver of any statute of limitations defense.
35 See footnote 13 and accompanying text.
Case 08-01031-t Doc 135 Filed 11/09/12 Entered 11/09/12 13:27:58 Page 10 of 14

-11-
6. 	Complaint on Promissory Notes. In this claim Friedman asks for a money
judgment on four promissory notes in the amount of $650,000 plus 10% interest. For the reasons
set forth above, the Motion is denied with respect to this claim.
C. 	Lapeer’s Claim. 	Lapeer claims that Plaintiff owes $101,400 for goods sold.
Motion, p. 8. 	The Court finds that there are fact issues preventing entry of summary judgment
on this claim, namely the extent to which Plaintiff can offset or recoup the amount due with
claims of its own, and whether Plaintiff owes the money, given Plaintiff’s allegations about
sending the International Truck contract work to Marvin Engineering. 	Response, p. 13; doc.
119, p. 33-35; doc. 88-1, p. 9, ¶45. Since Lapeer is an indirect affiliate of Friedman, Plaintiff’s
argument that the $101,400 should be paid by Marvin Engineering, the entity that allegedly made
all of the profit on the International Truck contracts, needs to be tried.
D. 	Plaintiff’s Count I (Turnover). 	Plaintiff’s turnover count is really a claim for
damages, or for an accounting, or for breach of contract. 	Such actions typically are not
“turnover” actions under 11 U.S.C. §542(b), which generally are limited to accounts receivable
collections. See e.g. In re Pixius Communications, LLC, 2005 WL 2850297, *2 (Bankr. D. Kan.
2005), citing United Methodist Youthville, Inc. v. Lutheran Social Services (In re United
Methodist Youthville, Inc.), 289 B.R. 754 (Bankr. D. Kan. 2003), and Lawrence P. King, 1
COLLIER ON BANKRUPTCY, ¶3.02[3][c], p. 3-43 (15th rev. ed. 2005). Treating Count I as a
claim for money due, the Court finds that the Disputed Facts prevent summary judgment in
Movants’ favor.
E. 	Plaintiff’s 	Count 	II 	(Declaratory 	Judgment 	and 	Recovery 	of 	Preferential
Transfers).
Case 08-01031-t Doc 135 Filed 11/09/12 Entered 11/09/12 13:27:58 Page 11 of 14

-12-
1. 	Declaratory Judgment. 	The Court finds that the Disputed Facts prevent
entry of summary judgment in Movant’s favor on this claim.
2. 	Recovery of Preferential Transfers. 	Plaintiff has asserted a preferential
transfer claim against Friedman, alleging that Friedman was an insider. 	The claim is for all
transfers made within one year of the petition date. 	The amount sought is not specified.
Friedman asks for summary judgment on the preference claim, arguing that there is no evidence
Friedman was an insider of the Plaintiff. Motion, p. 32-33. In the Response, Plaintiff argues that
the evidence raises a fact issue about Friedman’s insider status. The definition of “insider” uses
the term “includes,” so the Court may weigh all the facts presented at trial and determine
whether Friedman should be considered an insider of the Plaintiff. See, e.g., In re U.S. Medical,
Inc., 531 F.3d 1272, 1276 (10th Cir. 2008) (the word “includes” is not limiting); In re South
Beach Securities, Inc., 606 F.3d 366, 377 (7th Cir. 2010); In re Winstar Communications, Inc.,
554 F.3d 382, 395 (3d Cir. 2009) (recognizing “non-statutory insiders,” who fall within the
definition but outside of any of the enumerated categories). 	The record raises a material fact
issue about whether Friedman was an insider of the Plaintiff, so the Motion must be denied for
this claim.
F. 	Plaintiff’s Count III (Ten Claims).
1. 	Tortious Interference. Plaintiff’s Count III is a laundry list of ten claims,
including tortious interference. 	None is separately plead. 	The Court finds that the Disputed
Facts raise fact issues about the tortious interference claim.36
36 The Court is concerned that some of Plaintiff’s claims, including tortious interference, are not well plead. The
Court has the right to dismiss claims sua sponte if they are obviously deficient on their face. See Raiser v. Kono,
245 Fed. Appx. 732, 735 (10 th Cir. 2007), citing McKinney v. State of Oklahoma, 925 F.2d 363, 365 (10 th Cir. 1991).
Case 08-01031-t Doc 135 Filed 11/09/12 Entered 11/09/12 13:27:58 Page 12 of 14

-13-
2. 	Economic Duress. 	Plaintiff’s Count III includes a claim for economic
duress. The Court finds that the Disputed Facts prevent summary judgment on this claim.
3. 	Other Count III Claims. 	Movants did not specifically address the other
eight claims in Count III. 	Rather, Movants argue that all of the components of Plaintiff’s
damages 	calculation 	are 	undisputedly 	meritless, 	therefore 	entitling 	Movants 	to 	summary
judgment on the underlying claims. Plaintiff has conceded that two items of alleged damages are
without merit—net operating loss carryforwards and the Baileys’ loans to Plaintiff. 	Response,
pp. 13-14.37 With respect to the other damages components Plaintiff asserts, the Court finds that
there are fact issues, although the Court agrees with Movants that some of the alleged elements
appear weak on the current record.
IV. 	CONCLUSION
This adversary proceeding has complicated facts, and is further complicated by the
parties’ failure to document the essential terms of their post-1999 relationship. The Court has no
idea how the case will turn out after a trial on the merits, but concludes that summary judgment
is not appropriate. 	The Motion therefore will be denied. 	By so ruling the Court is not
determining the merits of any claim or defense.
This Memorandum Opinion shall constitute the Court's findings of fact and conclusions
of law under Fed.R.Bankr.P. 7052. An appropriate order will be entered.
Rather than dismiss the claims now, without prejudice, the Court will address its concerns at a status conference, to
be held as soon as the parties can be available.
Case 08-01031-t Doc 135 Filed 11/09/12 Entered 11/09/12 13:27:58 Page 13 of 14

-14-
________________________________________
Hon. David T. Thuma,
United States Bankruptcy Judge
Entered on the docket: November 9, 2012
Copies to:
Trey Arvizu
P.O. Box 1479
Las Cruces, NM 88004-1479
Chris Pierce
2632 Mesilla St., NE
Albuquerque, NM 87110
Linda Bloom
P.O. Box 218
Albuquerque, NM 87103
37 In the Response, the Plaintiff asserts that Doug Bailey may have claims against one or more of the Friedman
Group based on these alleged elements of Plaintiff’s damages claim. Currently, Mr. Bailey is not a plaintiff in this
matter and has not asserted any claim against any party.
Case 08-01031-t Doc 135 Filed 11/09/12 Entered 11/09/12 13:27:58 Page 14 of 14