Canam Steel Corporation et al v. TCI Environment NV/SA et al

UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
In re
TOTAL CONTAINMENT, INC.
Debtor
: Chapter 11
: Bankruptcy No. 04-13144bf
CANAM GROUP, INC.
Plaintiff
v.
TCI ENVIRONMENT NV/SA
Defendant
: Adversary No. 06-0647
MEMORANDUM
The defendant, TCI Environment NV/SA (a/k/a Delaware Valley
Enterprises NV) ("TCIE"), has moved to consolidate pursuant to Fed. R. Bankr. P. 7042
trial in the above-captioned adversary proceeding with the trial in Adv. No. 05-0145.
This consolidation motion is opposed by the plaintiff, Canam Group, Inc.
I.
The instant adversary proceeding concerns two alternative claims arising
from the payment by Canam Steel, plaintiffs assignor, upon a guarantee of a December
1999 promissory note, modified numerous times and last modified in September 2003,
made payable to Bank of America, which note was purportedly signed by TCIE and TCI
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(as well as other entities). Canam Steel allegedly repaid Bank of America the outstanding
balance on the promissory note in March 2005, and Canam Group now seeks repayment
from TCIE based upon theories of reimbursement, contribution or unjust enrichment.
The second adversary proceeding was brought by the former chapter 11
trustee against numerous defendants, including Canam Steel and Canam Group, and in
part asserts claims of breach of fiduciary duty and fraudulent conveyances surrounding
the transfer of assets in July 2002 from the debtor, TCI, to an entity known as PolyFlow,
Inc. The trustee, George L. Miller, alleges that various defendants, including Canam
Group and Canam Steel, acted in concert to divest TCI of a valuable pipe production
business for inadequate consideration, and immediately arranged the transfer of that
consideration to affiliates of Canam Group and Canam Steel.
In support of trial consolidation, TCIE (which denies any liability on the
promissory note) contends that TCI was the primary obligor on the note held by Bank of
America, and had the debtor used the PolyFlow consideration to repay its obligation on
that note, rather than transfer those funds to Canam affiliates, then TCIE's secondary
obligation would have been fully or partially satisfied. TCIE posits that if it can prove
that Canam Group or Canam Steel acted improperly in transferring TCI's assets, it would
have an equitable defense of unclean hands to defeat plaintiff's claims against it. TCIE
further contends that the trustee in his trial will attempt to prove the same misconduct
involving the same parties. Therefore, TCIE maintains that consolidation is warranted.
Canam Group counters that its two claims, based upon Maryland law
involving the common law rights of guarantors as well as the Maryland Uniform
Commercial Code Article 3, do not implicate, either factually or legally, the Pennsylvania
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common law and statutory claims raised by the chapter 11 trustee in the other adversary
proceeding. Moreover, the plaintiff maintains, the trustee's claims are much more
complex, involve many more parties (none of which include TCIE), deal with issues
beyond the PolyFlow transaction, and will require a much longer trial.
Thus, the plaintiff contends that there is no overlap between this adversary
proceeding, concerning the rights of a guarantor of an amended 1999 note against a co-
borrower, and the trustee's adversary proceeding, challenging the propriety of a 2002
transfer of TCI's assets, that justifies trial consolidation. It also argues that this
proceeding involving TCIE can be quickly tried, while the trustee's proceeding will
involve a much more extensive trial schedule.
II.
Fed. R. Bankr. P. 7042 incorporates Fed. R. Civ. P. 42. Rule 42(a)
provides:
(a) Consolidation. If actions before the court involve a
common question of law or fact, the court may:
(1) join for hearing or trial any or all matters at
issue in the actions;
(2) consolidate the actions; or
(3) issue any other orders to avoid unnecessary
cost or delay.
Thus, this procedural rule permits the consolidation for trial of separate
adversary proceedings that involve common questions of law or fact. See, g.g.. In re
Washington Mfg. Co.. 118 B.R. 555, 564 (Bankr. M.D. Tenn. 1990); Matter of Silver
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Mill Frozen Foods, Inc., 23 B.R. 179, (Bankr. W.D. Mich. 1982). The effect of an order
of consolidation is purely procedural. Consolidation does not substantively merge the
two lawsuits into one lawsuit. See Johnson v. Manhattan Ry. Co., 289 U.S. 479, 496-97
(1933): see generally Bergman v. City of Atlantic City. 860 F.2d 560. 565 (3rd Cir. 1988).
The purpose of consolidation is "to streamline and economize pretrial
proceedings so as to avoid duplication of effort, and to prevent conflicting outcomes in
cases involving similar legal and factual issues." Cima Labs, Inc. v. Actavis Group HF,
2007 WL 1672229, at *6 (D.N.J. 2007) (quoting In re TMI Litigation, 193 F.3d 613, 724
(3d Cir. 1999)). Generally, consolidation is used as a matter of procedural convenience
and judicial economy. Cella v. Togum Constructeur Ensemleier En Industrie
Alimentaire. 173 F.3d 909, 912 (3d Cir. 1999); see also Johnson v. Manhattan R. Co.. 289
U.S. 479, 497 (1933). As such, whether to consolidate litigation under Rule 7042 is
vested in the discretion of the trial court. See, e.g., In re Corey. 892 F.2d 829, 836 (9th
Cir. 1989).
The moving party bears the burden of proving common issues of fact or law
that would justify consolidation. See Cima Labs, Inc. v. Actavis Group HF. 2007 WL
1672229, at *6 (D.N.J. 2007). Absent such common issues, consolidation is
inappropriate. See, e.g., Enterprise Bank v. Saettele. 21 F.3d 233. 235-36 (8th Cir.
1994). If common issues exist, the trial court should then consider questions of
convenience and economy, as well as fairness and impartiality. Consolidation should not
be granted when it would adversely affect the rights of a party, or hinder the efficient
administration of the proceedings. See generally Primavera Familienstiftung v. Askin,
173 F.R.D. 115, 129 (S.D.N.Y. 1997). Conversely, consolidation may be appropriate
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when it will promote economy and convenience for the parties and the court. See In re
Appliance Store. Inc., 171 B.R. 525, 528 (Bankr. W.D. Pa. 1994).
In other words, when two adversary proceedings contain common issues of
fact or law, whether to grant a consolidation request under Rule 42(a) will require the trial
court to weigh "the interest in judicial convenience against the potential for delay,
confusion, and prejudice caused by consolidation." Ortho-McNeil Pharmaceutical, Inc. v.
Kali Laboratories. Inc.. 2007 WL 1814080 (D.N.J. 2007) (citing Paxonet Communs.. Inc.
v. TranSwitch Corp., 303 F. Supp. 2d 1027, 1029 (N.D. Cal. 2003)); Kerlev v. Great
Lakes Dredge & Dock Co.. 1996 U.S. Dist. LEXIS 1963, at *3 (E.D. Pa. Feb. 22, 1996);
Bernardi v. Scranton, 101 F.R.D. 411, 413 (M.D. Pa. 1983). The most important factor in
balancing these competing interests is whether the resulting trial or hearing will be fair
and impartial. See Cima Labs. Inc. v. Actavis Group HF, 2007 WL 1672229, at *5
(D.N.J. 2007). The court must determine:
[WJhether the specific risks of prejudice and possible
confusion [are] overborne by the risk of inconsistent
adjudications of common factual and legal issues, the burden
on parties, witnesses, and available judicial resources posed
by multiple lawsuits, the length of time required to conclude
multiple suits as against a single one, and the relative expense
to all concerned of the single-trial, multiple-trial alternatives.
Hendrix v. Ravbestos-Manhattan. Inc., 776 F.2d 1492, 1495 (11th Cir. 1985).
In addition, a court may deny a request to consolidate even if common
issues are involved, when those issues are not significant, or when the evidence in one
proceeding is not directly relevant to the issues in the other proceeding, or when one
proceeding is further along in the discovery process than the other case. See Farahmand
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v. Rumsfeld. 2002 WL 31630709, at *2 (E.D. Pa. 2002); see also Borough of Olyphant v.
PPL Corp., 153 Fed. Appx. 80, 82 (3d Cir. 2005).
III.
At the outset, TCIE argues that Canam Group is judicially estopped from
opposing trial consolidation because the initial pretrial scheduling order jointly proposed
by the parties suggested a consolidated trial. See Docket Entry #17, at If 7. Although no
consolidation order was entered, TCIE then asserts that it relied upon this joint request in
"shaping its discovery strategy," Defendant's Memorandum, at 1 n.2.
Three requirements must be met before a district court may
properly apply judicial estoppel. First, the party to be
estopped must have taken two positions that are irreconcilably
inconsistent. .. . Second, judicial estoppel is unwarranted
unless the party changed his or her position "in bad faith-i.e.,
with intent to play fast and loose with the court." . . . Finally,
a district court may not employ judicial estoppel unless it is
"tailored to address the harm identified" and no lesser
sanction would adequately remedy the damage done by the
litigant's misconduct... .
Montrose Medical Group Participating Savings Plan v. Bulger, 243 F.3d 773, 779-80
(3d Cir. 2001).
The defendant does not cite any reported decision in which trial
consolidation was ordered over the opposition of a party on the basis of judicial estoppel.
Moreover, in this instance, it appears more likely that plaintiffs change in position stems
more from the reshaping of the factual and legal issues based upon pretrial discovery and
the summary judgment rulings in this adversary proceeding and in the trustee's
proceeding, rather than from bad faith. Furthermore, from the extensive documents
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submitted by TCIE in the parties' cross-motions for summary judgment, it does not
appear that the defendant shied away from undertaking discovery in favor of the trustee's
efforts.1
Thus, I decline to order Rule 42 consolidation based upon judicial estoppel.
TCIE next maintains that if it can demonstrate that Canam Group, or its
assignor, Canam Steel, had "unclean hands" then such conduct would be an affirmative
defense to one or both counts of the amended complaint. And as the trustee also intends
to demonstrate such inequitable conduct as concerns the PolyFlow transaction, TCIE
asserts there is a factual and legal overlap between these two proceedings that warrants a
consolidated trial.
Recently, in the context of summary judgment motions, I had occasion to
examine the legal issues as well as the evidence that the parties intend to proffer at trial in
each of the adversary proceedings. Both of Canam Group's claims in this adversary
proceeding are based upon Maryland law. I agree with TCIE's assertion that, in general,
under Maryland law, the doctrine of unclean hands can preclude a plaintiff's recovery
under theories of unjust enrichment, reimbursement or contribution. See generally
Adams v. Manown. 328 Md. 463 (1992); Mona v. Mona Electric Group, Inc., 176 Md.
App. 672 (2007). This common law affirmative defense, which may be raised against
claims either at law or in equity, see Mona v. Mona Electric Group, Inc., 176 Md. App. at
713, is not precluded by the Uniform Commercial Code, see Maryland Code, Commercial
Law, § 3-116(b); Hartford Fire Ins. Co. v. Maryland Nat. Bank, N.A..
'TCIE does not specify in its consolidation motion or legal memorandum any
discovery not undertaken because it anticipated a consolidated trial.
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341 Md. 408, 413 (1996), and is applied by Maryland courts in the following manner:
The equitable doctrine of unclean hands is "designed to
'prevent the court from assisting in fraud or other inequitable
conduct '" • Gordon v. Posner. 142 Md. App. 399, 433,
790 A.2d 675 (quoting Adams v. Manown. 328 Md. 463, 482,
615 A.2d 611 (1992)), cert, denied. 369 Md. 180, 798 A.2d
552 (2002). It is available to deny relief to those guilty of
unlawful or inequitable conduct with respect to the matter for
which relief is sought. Hicks v. Gilbert. 135 Md. App. 394,
400, 762 A.2d 986 (2000). It is "not applied for the
protection of the parties nor as a punishment to the
wrongdoer." Adams v. Manown. 328 Md. at 474-75, 615
A.2d 611. Instead, "it protects the integrity of the court and
the judicial process by denying relief to those persons 'whose
very presence before a court is the result of some fraud or
inequity.'" Hicks, 135 Md. App. at 400, 762 A.2d 986
(citation omitted).
Turner v. Turner. 147 Md. App. 350, 419 (2002). Moreover:
For the clean hands doctrine to apply, "there must be a nexus
between the misconduct and the transaction [at issue],
because '"what is material is not that the plaintiffs hands are
dirty, but that (she) dirties them in acquiring the right (she)
now asserts.'" Turner, supra. 147 Md. App. at 420, 809 A.2d
18 (quoting Hicks, supra. 135 Md. App. at 400-01, 762 A.2d
986). In other words, "[t]he plaintiffs misconduct must be
directly related to the subject of the suit." Smith, supra, 124
F.R.D. at 106. See also Adams, supra. 328 Md. at 475, 615
A.2d 611 ("[A]n important element of the clean hands
doctrine is that the alleged misconduct must be connected
with the transaction upon which the claimant seeks relief.");
and Dan B. Dobbs, Law of Remedies, § 2.4(2) at 95 (2d 1993)
("Courts are agreed that the plaintiffs improper conduct,
whatever it is, must be related in some substantial and
significant way to the claim he now asserts,")-
Mona v. Mona Elec. Group, Inc.. 176 Md. App. at 714-715; see also Northeast Women's
Center. Inc. v. McMonagle. 868 F.2d 1342, 1354 (3d Cir. 1989) ("Thus, the doctrine is to
be applied 'only where some unconscionable act of one coming for relief has immediate
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and necessary relation to the equity that he seeks in respect of the matter in litigation.'")
(quoting Keystone Driller Co. v. General Excavator Co.. 290 U.S. 240, 245-46 (1933)).
In Mona. the Maryland appellate court agreed that the defendant could
properly assert unclean hands against the plaintiffs claim for unpaid corporate dividends,
where the dividends were reduced by repayment of a corporate receivable that the
plaintiff had previously represented to the IRS and to the corporation would be his
personal responsibility. Conversely, in Adams, the Maryland Supreme Court held that the
plaintiff's claim against defendant to recover for unpaid loans was not barred by unclean
hands because that claim was not sufficiently related to plaintiffs alleged fraudulent
concealment of marital property, i.e. a boat, from his ex-spouse.
In this adversary proceeding, I agree with Canam Group that any
misconduct on its part concerning TCI's PolyFlow transaction is not directly related to its
claims against TCIE based upon repayment of Bank of America's promissory note. Thus,
defendant's assertion of an affirmative defense of unclean hands as to that transaction
would be unavailing. See generally Rooney v. Slomowitz. 784 N.Y.S.2d 189 (N.Y. App.
Div. 3d Dep't 2004) (plaintiffs concealment of ownership of second parcel sold in same
transaction did not affect defendant's ability to construct access road on first parcel).
TCIE's liability, if any, to Bank of America—and on a contingent, unliquidated basis to
Canam Steel as guarantor—first arose in December 1999, long before the July 2002
PolyFlow transaction took place. Moreover, Canam Steel's claim against TCIE, if any,
became fixed in March 2005, years after the PolyFlow transaction. See generally
Norwich Sav. Society v. Hunter. 1996 WL 218711, at *4 (Conn. Super. 1996):
Yet, to successfully assert the doctrine of unclean hands as an
affirmative defense to foreclosure, the mortgagor must allege
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[that] inequitable conduct occurred during the actual
transaction, meaning prior to the default by the mortgagor.
Events occurring post-default and during the course of
litigation cannot form the basis of an affirmative defense to
foreclosure because they do not render the note itself invalid
or unenforceable.
Because the defendant's affirmative defense is predicated on
events occurring post-default and challenges a subsequent act
by the lienholder it fails as a matter of law.
In addition, TCIE's contention—that TCI should have taken the PolyFlow
consideration to pay down its obligation to Bank of America in July 2002—overlooks
certain facts that were revealed in the summary judgment motions: TCI's obligation to
Bank of America at the time far exceeded the amount PolyFlow paid to TCI; Dayco
Products held a $3.7 million judgment against TCI; the trustee contends that the PolyFlow
transaction was undertaken to prevent execution by Dayco upon its judgment; TCI was
not in default of its obligation to Bank of America in July 2002; Bank of America agreed
to the PolyFlow transaction; and the trustee's claim of deepening insolvency implies that
TCI should have retained the PolyFlow funds to operate its business rather than disburse
that consideration to any creditors.
Therefore, even if there were a temporal connection between Canam's
alleged misconduct and its claims against TCIE in this adversary proceeding, the issue of
unclean hands is too speculative, gee generally Welsh v. Case. 180 Ore. App. 370, 385-86
(2002), and the factual and legal theories of the two proceedings on this point are at odds;
thus consolidation could yield confusion.
In addition, TCI owns 99% of TCIE's outstanding stock. Were the trustee
to prevail on his claims against Canam Group and other defendants, he is doing so on
behalf of TCI's creditors as a collective group. Should TCIE be held liable to Canam
10
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Group, it may hold a claim against TCI, which claim may already be considered, at least
indirectly, in the trustee's damage assertions. And finally, the much larger scope of the
trustee's adversary proceeding suggests that consolidation may not be economical.
Accordingly, TCIE's request for consolidation of the trial of this adversary
proceeding with the trustee's proceeding shall be denied due to: lack of a common legal
or factual issue involving the affirmative defense of unclean hands; possible prejudice to
the plaintiff; and lack of economy.
An appropriate order shall be issued.
11
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UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
In re
TOTAL CONTAINMENT, INC.
Debtor
: Chapter 11
: Bankruptcy No. 04-13144bf
CANAM GROUP, INC.
Plaintiff
v.
TCI ENVIRONMENT NV/SA
Defendant
: Adversary No. 06-0647
ORDER
AND NOW, this 25th day of March 2008, for reasons stated in open court,
it is hereby ordered that defendant's motion to consolidate trial in this adversary
proceeding with trial in Adv. No. 05-0145 is denied.
It is further ordered that trial in this proceeding shall commence on May 22,
2008 at 9:30 a.m. in Bankruptcy Courtroom #2.
BRUCE FOX
United States Bankruptcy Judge
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copies to:
Phillip E. Wilson, Jr., Esq.
DLA Piper US LLP
One Liberty Place
1650 Market Street, Suite 4900
Philadelphia, PA 19103
Jeffrey D. Herschman, Esq.
DLA Piper Rudnic Gray Gary US, LLP
6225 Smith Ave
Baltimore, MD 21290
Craig Martin, Esq.
Edwards Angell Palmer & Dodge LLP
919 North Market Street
Wilmington, DE 19801
Ms. Barbara Townsend, Courtroom Deputy
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