Steelox Systems, LLC v. Stone City Products, Inc.

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION
In Re
STEELOX SYSTEMS, LLC, d/b/a
Steelox, d/b/a Steelox
Building Systems, d/b/a
Steelox Roofing Systems, and
d/b/a Armco Roofing Systems
Debtor
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STEELOX SYSTEMS, LLC
Plaintiff
vs.
STONE CITY PRODUCTS, INC.
Defendant
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Case No. 04-19786
Adversary No. 05-1093
Chapter 11
Judge Burton Perlman
This document has been electronically entered in the records of the United
States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
Dated: August 29, 2006
____________________________________________________________
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DECISION
Plaintiff in this adversary proceeding is the debtor in the
above identified Chapter 11 bankruptcy case. Plaintiff was in the
business of selling manufactured steel products and defendant was
a supplier for it, manufacturing products to be sold by plaintiff.
After filing bankruptcy, plaintiff secured authority from the
court to sell assets. 	Defendant filed an objection to plaintiff’s
motion 	for 	such 	authority 	contending 	that 	certain 	dies 	in 	its
possession 	which 	plaintiff 	proposed 	to 	include 	in 	its 	sale, 	were
not 	the 	property 	of 	plaintiff, 	but 	rather 	belonged 	to 	defendant.
The 	parties 	settled 	the 	objection 	and 	allowed 	the 	sale 	to 	go
forward, providing a fund of $97,850.00 from the sale be placed in
escrow, with ownership of the dies to be determined later.
This 	court 	has 	jurisdiction 	of 	this 	matter 	pursuant 	to 	28
U.S.C. §1334(b) and the General Order of Reference entered in this
district. 	This is a core proceeding arising under 28 U.S.C. §157.
In its complaint in this adversary proceeding, plaintiff seeks
to have the escrow fund turned over to it, contending that the dies
which were the subject of defendant’s objection to the sale belong
to 	it. 	In 	addition, 	the 	machines 	referred 	to 	in 	defendant’s
objection to sale allegedly were not sold by plaintiff in the sale
which 	was 	conducted. 	Defendant 	filed 	a 	counter-claim 	with 	its
answer. 	In 	it, 	it 	prayed 	that 	the 	escrow 	fund 	be 	paid 	to 	it,
because, it says, it, not plaintiff, owned the dies in question.
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The case came on for trial to the court on June 20, 2006, at
the 	conclusion 	at 	which 	the 	court 	reserved 	decision, 	and 	the
parties 	set 	a 	time 	frame 	for 	the 	submission 	of 	briefs 	in 	lieu 	of
closing arguments.
1. 	The Escrow Fund.
In 	the 	Chapter 	11 	bankruptcy 	case 	in 	which 	the 	present
adversary proceeding arises, the debtor, on February 4, 2005, filed
a Motion for Court Approval of a §363 Sale of Certain Assets. 	The
motion was noticed to creditors. 	On February 22, 2005, defendant
herein 	filed 	an 	objection 	to 	the 	sale. 	Its 	objection 	was 	not
general, but went to certain dies and machines. 	In its objection,
defendant said: “The property in question consists specifically of
the following items: two secondary piercing dies ($3,000.00); one
primary 	stamping 	die 	($44,850.00); 	a 	Talox 	machine 	($35,000.00);
and a sealant machine ($15,000.00). 	The total estimated value of
the 	property 	in 	question 	is 	$97,850.00.” 	It 	was 	then 	agreed
between 	the 	parties 	and 	approved 	by 	the 	court 	that 	from 	the
proceeds of sale, $97,850.00 would be set aside in escrow, and then
the sale could proceed free and clear of any lien. 	The court then,
on 	February 	26, 	2005, 	issued 	an 	order 	approving 	the 	sale. 	In
addition, the same order provided that the sale would include “the
tools and dies in the possession of Stone City and identified in
the Stone City Objection.” 	Our order also provided:
Stone 	City 	does, 	indeed, 	deny 	that 	the 	equipment 	in
question is in any respect the property of Debtor. 	The
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property 	in 	question 	consists 	specifically 	of 	the
following items: two secondary piercing dies ($3,000.00);
one 	primary 	stamping 	die 	($44,850.00); 	a 	Talox 	machine
(35,000.00); 	and 	a 	sealant 	machine 	($15,000.00). 	The
total estimated value in question is $97,850.00.
After the sale and creation of the escrow, plaintiff filed the
present adversary proceeding. 	The relief sought therein, in part,
is that the escrow fund be released to plaintiff. 	With its answer,
defendant 	included 	a 	counter-claim. 	In 	the 	allegations 	of 	the
counter-claim, 	defendant 	does 	not 	make 	reference 	to 	the 	items
specified in its objection to the sale, but rather alleges that it
is entitled to compensation for machinery and equipment used in the
manufacture 	of 	products 	for 	plaintiff. 	While 	defendant 	alleges
that it “believes that the approximate amount of the value of the
tooling 	is 	in 	excess 	of 	$97,850.00,” 	in 	its 	prayer 	for 	relief 	it
asks 	only 	that 	the 	escrow 	fund 	be 	paid 	to 	it. 	Defendant 	thus
ignores the origin of the escrow fund and now asserts a basis for
recovery of the escrow fund entirely different from that stated in
its objection to sale. 	Defendant contends that it is not bound by
the 	specifics 	of 	its 	objection 	to 	the 	sale 	of 	assets 	because 	the
objection was withdrawn.
The court holds that defendant’s position in this respect is
mistaken. 	So far as the escrow fund is concerned, its disposition
must 	be 	based 	on 	the 	specifics 	of 	defendant’s 	objection 	to 	sale
which was the basis upon the court entered its order creating the
escrow. 	At 	the 	trial, 	the 	evidence 	was 	uncontradicted 	that 	the
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Talox machine and sealant machines were not sold at the asset sale.
Consequently, 	the 	amounts 	attributed 	to 	those 	two 	items 	which
totals 	$50,000.00 	will 	be 	released 	to 	plaintiff. 	Furthermore,
defendant 	has 	failed 	to 	prove 	that 	it, 	not 	plaintiff, 	owned 	“two
secondary piercing dies” or “one primary stamping die.” Defendant,
as an objecting creditor to the §363 sale, had the burden of proof,
which it has failed to sustain, that it was the owner of the dies
in question. In re DeSoto, 181 B.R. 704, 706-707 (Bankr. D. Conn.,
1995); In re Collins, 180 B.R. 447, 453 note. 9 (Bankr. E.D. Va.,
1995); In re Sabec, 137 B.R. 659, 670 note. 25 (Bankr. W.D. Mich.,
1992).
Defendant in its post trial brief made no effort to identify
the specific parts which are the subject of its objection to sale,
let alone make any showing that it owns those parts. 	Instead, in
its briefing, it deals only with a question of amortization paid by
plaintiff, a subject with which we will deal below.
We hold, therefore, that the entire amount of the escrow fund,
$97,850.00, shall be released to plaintiff.
2. 	Plaintiff’s Claim for Reimbursement of Overpayment.
Plaintiff, 	Steelox, 	LLC 	is 	a 	limited 	liability 	company. 	It
purchased the assets of a predecessor, Steelox Systems, Inc. on May
31, 2002. 	At the time of the purchase the name of the purchaser,
now debtor herein, was Armco Building Systems, LLC. 	On the advice
of counsel that it could not use that name, the name was changed to
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Steelox, 	LLC. 	The 	CEO 	of 	plaintiff 	is 	William 	Douglas 	Reynolds.
Reynolds was not connected to the company predecessor of plaintiff.
Defendant 	has 	possession 	of 	dies 	which 	it 	had 	used 	in 	the
manufacture of products for plaintiff and plaintiff’s predecessor.
It 	is 	common 	practice 	in 	the 	industry 	for 	a 	manufacturer 	like
defendant 	to 	purchase 	with 	its 	own 	funds, 	dies 	used 	in 	the
manufacture 	of 	products 	for 	a 	customer 	such 	as 	plaintiff. 	An
amortization 	amount 	is 	then 	attached 	to 	the 	price 	that
plaintiff/purchaser 	pays 	to 	defendant/manufacturer 	for 	each 	part
manufactured by defendant. 	When the amortization totals the cost
to 	defendant 	of 	the 	particular 	die, 	then 	the 	die 	becomes 	the
property 	of 	plaintiff. 	It 	is 	plaintiff’s 	position 	here 	that 	the
dies had been paid for by its predecessor which became the owner of
the dies, and such ownership was transferred to plaintiff upon the
purchase of the company. 	Plaintiff contends further, that it was
charged amortization after the amounts owed on the dies were paid.
In this suit plaintiff seeks to recover the amount it calculates it
overpaid for such amortization.
Defendant’s position is that it expended substantial amounts
for 	machinery 	and 	unused 	parts 	to 	support 	the 	service 	which 	it
rendered to Steelox. 	Defendant says that some of the amortization
payments 	which 	plaintiff 	attributes 	to 	payment 	for 	dies 	were, 	by
agreement, used to reimburse defendant for such amounts. Plaintiff
contends 	that 	there 	was 	no 	such 	agreement 	and 	that 	amortization
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paid could only be applied to the cost of dies.
The 	court 	holds, 	and 	finds 	as 	a 	fact, 	that 	there 	was 	an
agreement 	between 	defendant 	and 	plaintiff 	or 	its 	predecessor 	to
reimburse 	defendant 	for 	the 	cost 	of 	equipment 	such 	as 	the 	Talox
machine 	and 	sealant 	machine, 	the 	necessity 	for 	purchase 	of 	both
machines having arisen from the needs of plaintiff, and were used
exclusively for that purpose. 	Defendant’s CEO, Rariden, testified
that there was such an agreement, and his testimony is supported by
exhibits 	containing 	extensive 	correspondence 	between 	the 	parties
during the time they were working together, particularly 1995 thru
1998. 	The exhibits show an amicable and cooperative relationship
between the parties during this period of time. Indeed, until the
filing 	of 	the 	bankruptcy 	case, 	the 	parties 	were 	working 	closely
together. 	In such a context the court finds it entirely credible
that 	the 	parties 	did 	deal 	with 	each 	other 	by 	verbal 	agreement 	as
testified to by Rariden. 	There was, then, an agreement between the
parties that a portion of the amortization received by defendant in
payment for the product of dies, went, not to payment for dies, but
to payment for machines and unused parts. Plaintiff’s case depends
on its assertion that amortization payments could only be applied
to dies payments. 	We find this position not to be in accord with
the facts.
Having reached this conclusion, the court holds that plaintiff
has failed to prove that it has overpaid amortization.
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To the extent that the complaint seeks relief for recovery of
overpayment of amortization charges, it is dismissed.
3. 	Defendant’s Claim for Damages.
The allegations of the defendant’s counter-claim amount to a
claim for damages. 	We have already found, contrary to defendant’s
prayer 	for 	relief, 	that 	defendant 	has 	not 	shown 	a 	basis 	for 	an
award 	of 	the 	escrow 	fund. 	It 	appears 	to 	be 	the 	position 	of
defendant that as a result of the agreement between 	the parties to
which we have referred in the preceding section, there is a balance
owing 	from 	plaintiff 	to 	defendant. 	To 	warrant 	a 	recovery 	by
defendant, defendant has the burden of proof, not only that there
was an agreement that it be compensated for the machines and parts
which it says are the subject of the agreement, but also the amount
to which it is entitled. 31A C.J.S. Evidence §122. The court holds
that defendant has carried its burden.
We 	have 	already 	found 	that 	there 	was 	a 	verbal 	agreement
between 	the 	parties, 	and 	we 	conclude 	as 	well 	that 	defendant 	has
quantified the amount due it. 	Rariden testified that he prepared
defendant’s Exhibit F for trial. 	He testified that the Exhibit was
prepared 	only 	after 	he 	had 	carefully 	reviewed 	the 	records 	of 	the
debtor. 	Rariden, 	in 	the 	exhibit, 	shows 	the 	derivation 	of 	items
comprising the “commercial issues”, which is the term employed by
defendant to identify items for which plaintiff had agreed to pay.
The 	court 	does 	have 	an 	issue 	with 	the 	last 	line 	in 	defendant’s
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Exhibit F, and will not allow that amount because no basis for it
has been shown. 	We hold that defendant is entitled to recover from
plaintiff the sum of $101,360.27 as shown in defendant’s Exhibit F.
Plaintiff contends that it cannot be held liable for the debts
of Steelox, Inc., the predecessor of Steelox, LLC. 	That contention
fails. 	There 	is 	no 	evidence 	that 	Steelox, 	LLC 	gave 	notice 	to
defendant 	that 	it 	had 	purchased 	the 	assets 	of 	Steelox, 	Inc. 	and
that 	it 	would 	not 	be 	responsible 	for 	the 	debts 	of 	Steelox, 	Inc.
Instead, plaintiff employed a firm identification which to the non-
legal 	eye 	is 	indistinguishable 	from 	that 	of 	its 	predecessor, 	and
defendant 	continued 	to 	deal 	with 	plaintiff 	as 	though 	it 	were 	the
same 	entity 	as 	Steelox, 	Inc. 	See, 	e.g., 	Antiphon 	Inc. 	v. 	LEP
Transport, 	Inc. 	183 	Mich. 	App. 	372, 	454 	N.W. 	2d 	222 	(Ct. 	Apps.,
Mich., 1990).
* 	* 	*
Accordingly, the court has concluded that:
1. 	Plaintiff 	shall 	have 	the 	escrow 	released 	to
it;
2. 	The 	complaint 	is 	dismissed 	as 	to 	plaintiff’s
claim for overpayment of amortization charges;
and
3. 	Defendant shall have judgment against plaintiff in
the 	amount 	of 	$101,360.27 	which 	shall 	be 	an
unsecured claim in the bankruptcy case of debtor.
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Copies to:
Michael W. Allen
Allen & Associates LPA
52 E. Mulberry
P.O. Box 435
Lebanon, OH 45036
Earl Messer
Richard Ferrell
Taft, Stettinius & Hollister
425 Walnut Street, Suite 1800
Cincinnati, OH 45202
U.S. Trustee
36 E. 7 th Street
Cincinnati, OH 45202
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