Judge insists creditor take the money

September 27, 2016

empty pockets image: bankruptcy or debt settlement?In an unusual motion filed in bankruptcy court, two Chapter 11 debtors sought authorization to pay the more than half-million dollars they owed to creditor Nagel Precision Inc., a manufacturer of “superfinishing” machines. The debtors proposed immediate payment in full with interest.

But the folks at Nagel resisted payment.

In re RnD Engineering LLC, et al., No. 14-58049, 2016 WL 4361220 (Bankr. E.D. Mich. Aug. 15, 2016)

They wanted to continue to oppose confirmation of the debtors’ Chapter 11 plan of reorganization and to seek appointment of a trustee — all for the express purpose of putting the debtors out of business.

Judge Phillip J. Shefferly of the U.S. Bankruptcy Court for the Eastern District of Michigan ruled that Nagel did not have the right to refuse to accept payment.

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The dispute began in state court where Nagel sued its former employee Richalin Digue and his company RnD Engineering LLC. The lawsuit alleged misappropriation of trade secrets, intentional interference with business relations, breach of fiduciary duty, and unjust enrichment. Nagel sought damages and, importantly, an injunction to stop Digue and RnD Engineering from competing.

Before trial, Digue and RnD Engineering both filed for Chapter 11 relief. That had the effect of staying the lawsuit. However, Nagel commenced litigation in the bankruptcy court making essentially the same claims.

The bankruptcy court held a trial and awarded Nagel $564,503. Judge Shefferly held that Digue breached his fiduciary duty during the time he worked for Nagel, and that both debtors intentionally interfered with Nagel’s business relations and had been unjustly enriched.

The judge also ruled with regard to Digue personally that he could not discharge the debt in the bankruptcy case. But Judge Shefferly refused to grant an injunction to stop the debtors from competing because Nagel failed to prove that the debtors misappropriated any of its trade secrets, which was the sole basis for its request for injunctive relief.

Fast forward to the impending confirmation hearing on the debtors’ reorganization plan, under which all creditors would be paid in full.

Nagel tried to block confirmation and that’s when the debtors filed their motion. Attached to the motion was a bank statement showing the tidy sum of $593,000 deposited into a special account for the exclusive purpose of paying Nagel in full. The motion indicated that the debtors wished to move forward toward plan confirmation without further litigation.

Nagel opposed the motion, raising several arguments as to why it did not have to take the money. The creditor feared — rightly — that if it was paid in full it would no longer have standing to argue in bankruptcy court.

Judge Shefferly ruled in favor of the debtors, noting that he had already determined that Nagel was not entitled to an injunction. In his prior opinion, the judge awarded Nagel substantial monetary damages and explained why Nagel failed to prove that it was entitled to enjoin the debtors from continuing in business.

“After the Nagel claim has been paid in full, the court will not permit Nagel to use these Chapter 11 cases to indulge its desire to put the debtors out of business, no matter how understandable Nagel’s anger at the debtors’ prepetition misconduct,” Judge Shefferly concluded.