BANKRUPTCY DIVISION
DIVISION OF ST. CROIX
In re: ) Chapter 7
)
Sanitas Partners, V.I., LLC, ) Case No. 1-16-bk-10005 (MFW)
)
Debtor. ) Rel Docs. 168, 170, 225, 226,
) 227, 230
MEMORANDUM OPINION1
Before the Court is the Objection of creditor GEC, LLC
(“GEC”) to the claim filed by Capstone Business Funding, LLC
(“Capstone”). For the reasons stated below, the Court will allow
in part and disallow in part Capstone’s claim.
I. BACKGROUND
In April 2010, Sanitas (the “Debtor”) executed a contract
with the Virgin Islands Waste Management Authority (the “WMA”) to
design, build, and operate the St. Croix Solid Waste Transfer
Station (the “SCTS Contract”). On June 13, 2016, several
creditors including GEC, filed an involuntary chapter 11 petition
against the Debtor. The Debtor filed a motion to dismiss the
involuntary petition, which the Court denied on March 17, 2017.
The case was subsequently converted to chapter 7 on August 7,
2017, and Adam Hoover was appointed as the trustee (the
“Trustee”).
1 This Memorandum Opinion constitutes the findings of
fact and conclusions of law of the Court pursuant to Rule 7052 of
the Federal Rules of Bankruptcy Procedure, which is made
applicable to contested matters by Rule 9014(c).
During the gap period between the involuntary filing and the
Court’s denial of the Debtor’s motion to dismiss the case, the
Debtor assigned to Capstone a series of monthly accounts
receivable owed to the Debtor by WMA (for the months of May,
June, July, August, October, and November 2016). The Debtor and
Capstone executed a separate Purchase and Sale Agreement (“PSA”)
for each WMA receivable assigned. For each PSA, Capstone and WMA
executed a corresponding estoppel agreement under which WMA
agreed to pay the factored invoices directly to Capstone.
Capstone’s original proof of claim sought $826,935.71 as a
secured claim based on: (i) $782,147.11 for accounts receivable
purchased from the Debtor, (ii) $10,278.71 for legal fees in
connection with Capstone’s collection efforts, and (iii)
$34,509.89 for a negative Working Capital Advance Balance (the
“Reserve Account”). (Proof of Claim 9, Ex. A.)
On July 5, 2017, Capstone sued WMA in New York state court
alleging an unpaid balance of $782,147.11 due on the factored
accounts under the estoppel agreements. The parties settled the
suit, pursuant to which WMA agreed to pay Capstone $450,000.
(D.I. 170, Ex. O.) Under the settlement, Capstone released any
cause of action that it could have alleged against WMA “their
successors, principals, agents, insurers, employees, assigns,
subsidiaries and/or subcontractors.” (Id. at ¶ 6.)
As a result of that settlement, Capstone now asserts it is
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owed $332,147.11 as the remaining amount of its accounts
receivable claim, plus $49,822.07 as misdirected payment fees,
$35,831.33 in legal fees, and $35,109.89 for the negative Reserve
Account. Capstone asserts that its entire claim is secured by a
UCC-1 Financing Statement it filed on July 15, 2015, which lists
“[a]ll assets of the Debtor” as its collateral. (D.I. 225, Ex.
T.)
On March 28, 2018, the Trustee filed an adversary proceeding
against WMA. (D.I. 151.) In that action, the Trustee alleged
that WMA owed the Debtors a total of $4,312,750, which included
(i) $1,207,000 in unpaid service fees due to the Debtor under the
SCTS that had not been factored; (ii) $780,000 in consequential
damages caused by the Debtor being required to factor invoices to
Capstone as a result of WMA’s non-payment under the SCTS; and
(iii) $2,325,750 for WMA’s alleged wrongful termination of the
contract in June 2017. (Id. at ¶¶ 9, 10, & 11.)
On November 19, 2019, the Trustee filed a proposed
settlement of its adversary proceeding against WMA which this
Court granted on December 9, 2019. (D.I. 191; D.I. 199.) Under
the settlement, WMA agreed to pay the Trustee $1,525,000 in
satisfaction of all the Trustee’s claims, which includes: (i)
$1,351,036.93 in unpaid, unfactored invoices; (ii) $857,657.65
for “factoring losses” incurred as a result of WMA’s chronic late
payment of invoices; and (iii) $807,500 in lost revenue resulting
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from WMA’s alleged wrongful termination. (D.I. 191 at 1-2; D.I.
226-2.) The settlement funds are to be paid by WMA in
installments. (D.I. 191; D.I. 199.)
On December 20, 2018, GEC filed an objection to Capstone’s
proof of claim. (D.I. 168.) Capstone responded on January 4,
2019. (D.I. 170.) On March 13, 2019, the Court held a hearing
on the objection and found that the dispute was conducive to
rendering a decision based on the documentary evidence. (D.I.
177.) The Court directed the parties to file any additional
exhibits they wished and a status report by June 15, 2019. (Id.)
After an extension of time to complete discovery, the parties
filed their additional responses and documents in late 2020.
(D.I. 225, 226, 230.) The matter is now ripe for decision.
II. JURISDICTION
The Court has subject matter jurisdiction over this
contested matter as it involves the allowance of claims and the
determination of a party’s interest in property of the estate.
28 U.S.C. §§ 157(b)(2)(B) & (K), 1334.
The Court has the authority to enter a final judgment on
this matter. See, e.g., Stern v. Marshall,
564 U.S. 462, 499
(2011) (bankruptcy court has authority to enter a final order
where “the action at issue . . . would necessarily be resolved in
the claims allowance process”).
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III. DISCUSSION
A. Legal Standard
The filing of a proof of claim constitutes prima facie
evidence of a valid claim. See 11 U.S.C. § 502(a); In re
Catholic Diocese of Wilmington, Inc.,
513 B.R. 639, 643 (Bankr.
D. Del. 2014). Once an objecting party produces evidence
sufficient to place the claim at issue, however, the claimant
bears the ultimate burden of proving the validity of its claim by
a preponderance of the evidence. In re Allegheny Int’l, Inc.,
954 F.2d 167, 173–74 (3d Cir. 1992).
Here, Capstone filed a proof of claim and attached
supporting documents. GEC objected, asserting that the PSAs were
true sales of the receivables and, therefore, the Debtor is no
longer liable to Capstone for the factored invoices. As a
result, Capstone bears the ultimate burden of proving its right
to payment from the Debtor’s estate by a preponderance of the
evidence.
B. Objections to Capstone’s Secured Claim
1. Capstone’s Settlement with WMA
GEC initially argues that Capstone’s claim must be
disallowed in full as a result of Capstone’s settlement of its
New York action against WMA, which GEC contends released any
claim Capstone may have against the Debtor.
Capstone responds that the New York action only asserted
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claims that it had against WMA under the estoppel agreements, not
any claims it had against the Debtor. It notes that the Debtor
was not a party in that case. Capstone also contends that its
claims against WMA were based on the estoppel agreements it had
with WMA, not the PSAs to which WMA was not a party. As a
result, Capstone contends that no claims against the Debtor under
the PSAs were released by its settlement with WMA.
The Court concludes that Capstone’s settlement with WMA does
not bar its claims against the Debtor. The Debtor was not a
party to that suit and the Debtor is not a “successor, agent,
insurer, employee, assign, subsidiary, or subcontractor” of WMA.
Moreover, Capstone did not bring (and could not have brought) an
action against WMA under the PSAs because WMA is not a party to
those contracts. Therefore, Capstone’s claim against the Debtor
under the PSAs was not released by the Capstone settlement of its
suit against WMA under the estoppel agreements.
2. Reserve Account Balance
Part of Capstone’s claim is a claim for $35,109.89 based on
the Debtor’s alleged liability for a Reserve Account Capstone
maintained in connection with the PSAs.
GEC objects to the Reserve Account claim asserting that
Capstone has provided no documentation to support its purported
capital advance loans or the Debtor’s promise to pay any portion
of the Reserve Account balance.
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The Reserve Account claim consists of working capital
advances Capstone allegedly provided to help the Debtor cover
payroll and emergency expenses. Capstone asserts that the
Reserve Account balance was to be paid by the assignment of
invoice VIWMASF 1065 to Capstone. However, Capstone presented no
evidence of an agreement to that effect and admitted that the
parties did not execute a PSA for that invoice. (D.I. 225 at ¶
31.)
The Court concludes that Capstone has failed to satisfy its
evidentiary burden with respect to the Reserve Account claim.
The terms of the PSA do not provide for working capital loans.
(D.I. 170, Exs. A-F.) Further, Capstone concedes that there is
no written evidence of an agreement or assignment of any invoice
to cover Capstone’s alleged Reserve Account balance. (D.I. 225
at ¶ 31.) Therefore, the Court will disallow Capstone’s
$35,109.89 Reserve Account claim.
3. Attorney’s Fees
Capstone also asserts a $35,831.33 claim for attorney’s fees
incurred enforcing its right to payment on the factored invoices.
Capstone contends that the Debtor agreed to reimburse those
attorney’s fees under Paragraph (k) of the PSA, which provides:
(k) In the event it should become necessary for
[Capstone] to enforce its rights hereunder against
[Sanitas], or [WMA], [Sanitas] agrees that in addition
to the amount for which [Capstone] is enforcing its
rights, [Capstone] shall be entitled to receive up to
[a] maximum of thirty three and one third (33 1/3%) of
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the amount for which [Capstone] is enforcing the rights
as and for [Capstone’s] attorney’s fees therefore.
(D.I. 170, Exs. A-F at § k.) Capstone alleges that it is
entitled to the full amount of its attorney’s fees, because the
actual amount asserted is below the cap.
GEC argues that the Debtor never promised to pay legal fees
incurred by Capstone in its collection efforts against WMA, as
opposed to efforts to collect from the Debtor.
The Court concludes that the express language of the PSAs
provides a basis for a claim for attorney’s fees which Capstone
may have incurred enforcing its rights against either the Debtor
or WMA. However, the Court finds that, while it was afforded the
opportunity to submit documents in support of its claim for fees,
Capstone failed to provide any documentation or other evidence
that supports that claim. (D.I. 177 at 3.) Therefore, the Court
will disallow Capstone’s $35,831.33 claim for attorney’s fees.
4. Amounts Claimed for Unpaid Factored Invoices
Capstone argues that it has a claim totaling $332,147.11 for
remaining amounts due to it under the factored invoices.
GEC asserts that Capstone assumed the credit risk of the
factored invoices, which were sold without recourse to Capstone
at 70% of face value. It argues, therefore, that Capstone has no
claim against the Debtor for those invoices, but only had a claim
against WMA which it has settled and released.
Capstone responds that it has a claim against the Debtor for
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payments which were due to Capstone but were misdirected to the
Debtor by WMA. Capstone relies on the PSAs which provide that
Capstone is entitled to all funds due by WMA on factored
invoices. (D.I. 170, Exs. A-F at § o.) The Debtor agreed to
hold any payment it received on the factored invoices in trust
and to remit those funds to Capstone within two business days.
(Id.) Failure to forward any misdirected payments within five
business days is a default under the PSAs, entitling Capstone to
impose an additional charge of 15% of the misdirected funds.
(Id. at § o(ii).) It contends that payments WMA made to the
Debtor from September 2016 through June 2017 should have gone to
Capstone for the factored invoices dated March through August,
October, and November 2016, before WMA paid invoices due to the
Debtor for later months.
GEC argues that the payments that Capstone asserts were
misdirected were proper payment of invoices due to the Debtor
from WMA which had not been factored to Capstone. GEC further
asserts that because WMA is a public agency operating under
financial pressure, its payment decisions to pay the Debtor’s
invoices rather than Capstone’s older invoices was to assure that
the Debtor continued to provide services to WMA. GEC argues that
there is no legal or factual basis for Capstone’s claim that it
was entitled to payment from WMA of the factored invoices before
the Debtor’s invoices could be paid. The SCTS does not
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explicitly instruct WMA to pay invoices in chronological order.
(D.I. 225, Ex. R at 118 & Ex. S at 1-2.) Nor do the PSAs or
estoppel agreements require that WMA pay factored invoices before
paying non-factored invoices. (D.I. 170, Exs. A-F.) Therefore,
GEC argues that there is no basis for Capstone to argue that its
earlier factored invoices had to be paid before WMA could pay the
Debtor’s later unfactored invoices.
Capstone disagrees. It contends that under the STCS the
Debtor was to process solid waste, for which WMA was to pay an
annual fee in monthly installments. (Id., Ex. R at 18, 100,
132.) Capstone alleges that the payment history between WMA and
the Debtor demonstrates that invoices for the services were to be
paid chronologically. It contends that “[i]t is unsupportable
that WMA just happened to miss the payments that were properly
owed to Capstone and was only able to make payments on the
remaining, subsequent invoices” owed to the Debtor. (D.I. 225 at
¶¶ 47-50.)
In support, Capstone filed numerous documents, including the
declarations of the Debtor’s former officers, Geoffrey Starin and
Timothy Hodge. (D.I. 230-1; D.I. 230-2.) Both Starin and Hodge
admit that WMA fell behind on payments due to Capstone in the
second half of 2016 and that, nonetheless, between early
September and early October 2016, WMA made direct payments
totaling $170,461.66 (net of taxes) to the Debtor. (Id. at ¶¶ 6-
11.) On October 21, 2016, Capstone learned that WMA had made
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those payments and was in the process of authorizing an
additional payment to the Debtor of almost $250,000. (D.I. 170,
Ex. G.) In response, Capstone sent a letter to WMA and the
Debtor demanding the turnover of those funds and instructing WMA
to ignore any future instructions from the Debtor to have funds
due to Capstone sent to the Debtor (the “First Notice”). (Id.,
Ex. H.) Upon receiving that letter, WMA promised via email that
it would remit “all future payments . . . directly to Capstone.”
(Id., Ex. G at 1.)
Between October and December 2016, WMA did exactly that.
Capstone received a series of payments from WMA during that
period which totaled $852,327.89, and represented payment of its
factored invoices dated March through June, 2016. (Proof of
Claim 9, Ex. A.)
However, notwithstanding those assurances, in December and
January WMA again began sending payments to the Debtor. WMA sent
the Debtor payments totaling $47,500 in late December 2016 and
early January 2017. (D.I. 225, Ex. Q at Check No. 19418; D.I.
230-1 at ¶ 8; D.I. 230-2 at ¶ 8.) On January 13, 2017, Capstone
sent a second letter (the “Second Notice”) to WMA and the Debtor
asserting that those payments had improperly gone to the Debtors
and should be immediately remitted to Capstone. (D.I. 170, Exs.
J, K.) That same day, Capstone instructed the Debtor to wire to
it another payment that WMA was to send later that afternoon; the
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Debtor agreed to do so. (D.I 170, Ex. K at 1.) WMA did pay the
Debtor an additional $47,500 on January 13, 2017. (D.I. 225, Ex.
Q Check No. 19435; D.I. 230-1 at ¶ 10; D.I. 230-2 at ¶ 10.)
However, the Debtor never forwarded those funds to Capstone.
Instead, on January 30, 2017, the Debtor notified Capstone that
it was unable to forward those funds to Capstone because they had
been used to fund payroll and other critical expenses. (D.I.
170, Ex. L.)
Capstone argues that the above email exchanges with the
Debtor’s officers are an admission that the Debtor received and
failed to forward misdirected payments. It further contends that
those exchanges, and the other documents it provided, prove that
the Debtor continued to divert funds that should have gone to
Capstone.
GEC responds that the Debtor properly applied the payments
it received to unfactored invoices due to it at the time. GEC
notes that most of those payments specifically reference
unfactored invoices and the one that does not (the 12/30/16
check) was still properly applied by the Debtor to an invoice
dated December 1, 2016. GEC also relies on the Trustee’s
declaration to support its position. In his declaration, the
Trustee states that his own records, the Debtor’s documents, and
documents obtained from WMA do not contain any evidence of
misdirected payments. (D.I. 226-2.)
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The Court does not find the Trustee’s declaration probative.
The Trustee’s declaration merely states that he did not find any
record showing that the Debtor received payment from WMA for or
on account of any invoice that was sold to Capstone. (Id. at ¶
13.) However, the payments at issue occurred well before the
appointment of the Trustee and the declaration does not address
the issue of whether the payments received by the Debtor should
have been applied to the invoices factored to Capstone. (D.I.
74.)
The Court concludes that the January 13 and 30, 2017,
correspondence from the Debtor are admissions by the Debtor that
the $47,500 payment received on January 13, 2017, should have
been forwarded to Capstone. The Court also finds that those
admissions, and the other evidence presented, also support the
conclusion that the $47,500 in payments made in the weeks prior
to January 13, 2017, were also misdirected. (D.I. 170, Exs. K,
L; D.I. 230-1; D.I. 230-2; D.I. 225, Ex. Q at Check No. 19435.)
When confronted by Capstone in January 2017, both WMA and
the Debtor admitted that payments due to Capstone were being
diverted. Upon receiving the First Notice, WMA promised that all
future payments would be remitted directly to Capstone. (D.I.
170, Ex. G.) In addition, the Debtor admitted that the payments
it had received from WMA following the Second Notice were
misdirected funds properly owed to Capstone and that the Debtor
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should have forwarded the funds to it under the PSAs. (Id., Ex.
K.) At no time did either the Debtor or WMA assert that WMA was
free to pay the Debtor’s invoices before it paid Capstone’s
invoices.
Further, the Court concludes that Capstone has proven that
the Debtor received and failed to forward misdirected payments
after January 2017. WMA’s records reveal that after January
2017, WMA continued to skip paying the factored invoices due to
Capstone, while paying the Debtor for later non-factored
invoices. (D.I. 225, Ex. Q.) For example, after January 2017,
WMA paid the Debtor for unfactored invoices dated December 2016
through June 2017 without submitting any payment to Capstone on
its October and November 2016 invoices. (Id.)
The Court’s conclusion that the Debtor misdirected funds due
to Capstone is not surprising given the Debtor’s behavior in the
past. The Debtor began factoring invoices to Capstone after it
had pledged the revenue due under the SCTS Contract to other
creditors pursuant to a settlement agreement. (D.I. 56 at 5.)
By factoring the invoices, the Debtor was able to receive 70% of
their face value, without remitting anything to those creditors.
(D.I. 51 at 147-48.)
For the forgoing reasons, the Court concludes that Capstone
has proven that it has a claim totaling $332,147.11 for
misdirected funds. Because the Court concludes that those funds
14
were misdirected, Capstone is also entitled to a claim of
$49,822.07 as a 15% misdirection fee, for a total claim of
$381,969.18.
5. Secured Claim
Capstone argues that its claim is a secured claim under the
provisions of the PSAs. Under the PSAs, the Debtor granted
Capstone a continuing security interest “[t]o secure the
representations and covenants made by Seller [the Debtor] in this
Agreement, but not the credit risk of the accounts . . . .”
(D.I. 170, Exs. A-F at § l.) Capstone filed a UCC-1 Financing
Statement perfecting that security interest with the U.S. Virgin
Islands Territory on July 15, 2015. (D.I. 225, Ex. T.) Capstone
asserts that its entire claim is secured because it is based on
the Debtor’s misdirection of funds in violation of the PSAs and
not simply based on the credit risk.
GEC counters that Capstone’s failure to prove its claim is
based on the Debtor’s breach of representations or covenants made
in the PSAs. GEC argues that Capstone accepted the credit risk
of the factored invoices and therefore has no recourse against
the Debtor or its assets.
As the Court found above, Capstone’s claim is based on the
breach of the Debtor’s covenant under the PSAs wherein it agreed
it “shall hold any [misdirected payments] in trust for the
benefit of [Capstone], and shall pay over such monies . . .
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within 2 business days of receipt thereof.” (D.I. 170, Exs. A-F
at § o.) Therefore, the Court concludes that Capstone has
established that its claim is a secured claim under the terms of
the PSAs. (Id. at § l.) Further, the evidence shows that the
misdirected funds received by the Debtor were in excess of
Capstone’s claim. (D.I. 225, Ex. Q.) As a result, the Court
concludes that Capstone’s entire claim of $381,969.18 is for
misdirected payments and is therefore a secured claim.
GEC argues, however, that Capstone does not have any
security interest in the Trustee’s settlement with WMA because it
was a settlement only of claims that the Trustee pursued or could
have pursued against WMA. (D.I. 191-1.) Because the invoices
factored to Capstone were no longer owed to the Debtor, GEC
contends that the Trustee could not have sued on them. It relies
on the Trustee’s declaration which states that he “did not seek
payment for or on account of any [Debtor] invoice that had been
sold and assigned to Capstone.” (D.I. 226-2 at 3.)
Capstone argues that the Trustee’s settlement with WMA
further supports its secured claim. Capstone notes that the
settlement is in full and complete satisfaction of claims arising
from the services rendered by the Debtor under the SCTS Contract
and, therefore, asserts that those settlement payments include
amounts owed on the factored invoices, which were on account of
the Debtor’s performance under the SCTS. (D.I. 191-1 at 4; D.I.
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225 Ex. U at 4.) It notes that the Trustee’s complaint and
settlement both reference the Trustee’s claims for “factoring
losses” incurred by the Debtor. (D.I. 151 at 2; D.I. 191 at 2.)
The Court does not need to decide whether the Trustee sued
on behalf of Capstone’s factored invoices. Even if the
settlement funds only represent satisfaction of claims that the
estate had against WMA, Capstone still has an allowed secured
claim on all assets of the estate based on the UCC-1 financing
statement it filed. (D.I. 225, Ex. T.)
IV. CONCLUSION
The Court concludes that Capstone has a secured claim for
misdirected payments and fees under the PSAs in the amount of
$381,969.18.
An appropriate Order is attached.
Dated: July 16, 2021 BY THE COURT:
Dowd WAR
Mary F. Walrath
United States Bankruptcy Judge
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