Appeal From the Honorable Judge Eugene R. Wedoff.
The opinion of the court was delivered by: Honorable David H. Coar
Bankruptcy Case No. 02 B 43578
Bankruptcy Adv. No. 03 A 2234
MEMORANDUM OPINION AND ORDER
This matter comes before this Court on Appellant LaSalle Bank, N.A.'s appeal from the United States Bankruptcy court, where judgment was entered in favor of Great America Group, Inc. Great America Group, Inc. files a cross appeal.
Goldblatt's Bargain Stores, Inc. ("Goldblatt's") operated six retail stores in the Chicago area prior to its bankruptcy filing. LaSalle Bank, N.A. ("LaSalle) was Goldblatt's primary lender and held a security interest in substantially all of Goldblatt's assets, including its inventory. Goldblatt's financial situation worsened in early 2003, and in January 2003, it decided to liquidate its inventory and close two of it stores ("January Stores"). Goldblatt's retained Great American Group, Inc. ("GAG") to liquidate the remaining merchandise in the January Stores.
Accordingly, GAG and Goldblatt's entered into an agreement (the "January Agency Agreement") whereby GAG paid for and liquidated Goldblatt's merchandise for the two stores.
The terms of Goldblatt's loan documents with LaSalle required that LaSalle consent to this process since Goldblatt's debt to LaSalle was secured by Goldblatt's inventory. The parties sought and obtained LaSalle's consent to the liquidation in a two-page letter agreement (the "January Letter Agreement"). The January Letter Agreement provided that LaSalle would subordinate its security interest in Goldblatt's merchandise as consideration for GAG making an initial estimated payment of 75% of the Guaranteed Amount, which was 40% of what GAG estimated the retail value of the stores' inventory to be. GAG would then receive all the proceeds of the stores' sales following the completion of the physical inventory process. The parties agreed that a third party appraiser, Washington Inventory Service, would determine the ultimate value of the inventory, and if the value of the inventory fell below a certain amount, GAG would be reimbursed for a portion of the Guaranteed Amount. Transfers of merchandise out of the January stores were limited to those in the ordinary course of business.
On or about January 17, 2003, GAG paid LaSalle 75% of the Guaranteed Amount and took over operations of the January stores. Before the physical inventory process began, Goldblatt's transferred $475,000 (at cost) in inventory from its four remaining stores to the January Stores. Both GAG and Goldblatt's knew of the transfer, but neither informed LaSalle. The January transfers were included in the physical inventory, inflating the value of the January Stores' inventory.
In February 2003, Goldblatt's and LaSalle met to discuss the closing of the four remaining Goldblatts' stores, and whether to use Hilco as a possible liquidator. It was decided that GAG would again liquidate the merchandise of the four remaining stores (the "February Stores"). Goldblatt's and GAG entered into another agreement whereby GAG paid for and liquidated Goldblatt's merchandise for the February Stores (the "February Agency Agreement"). As with the January agreements, LaSalle still held a security interest in the merchandise, and its consent was required to undertake this process. LaSalle granted its consent with similar terms to the January Letter Agreement in a letter agreement dated February 14, 2003 (the "February Letter Agreement"). In the February Letter Agreement, LaSalle agreed to subordinate its security interest to GAG as consideration for the initial estimated payment by GAG of 85% of the Guaranteed Amount, which was set as 43% of the retail value of the merchandise. If the sum of the value of the inventory and gross rings fell below $6,075,000, GAG would be refunded a portion of the Guaranteed Amount, as calculated pursuant to the February Agency Agreement.
Unlike the January inventory count (which included the transfer), the February inventory produced a severe shortfall between the estimated retail value of the inventory and its actual retail value. The difference between the initial payment GAG made based on the estimated value of the inventory for the February Stores, and what GAG was required to pay, based on the actual value, resulted in an overpayment by GAG to LaSalle of $1,095,848. GAG requested that LaSalle return this overpayment, and LaSalle refused.
In July, 2003, the Trustee for Goldblatt's filed a Chapter 7 adversary complaint against defendants GAG and LaSalle. After a trial on the merits, the Bankruptcy court found that GAG had failed in a duty to disclose the transfer to LaSalle, resulting in fraudulent inducement. However, LaSalle was unable to prove damages, and thus the court could not award remedy to LaSalle. As such, the Bankruptcy court enforced the February Agreements and ordered LaSalle to pay $1,086,094.68 to GAG, after allowing for credits to LaSalle for fixtures. This amount represented GAG's overpayment of the estimated initial payment for inventory in the February stores pursuant to the formula set forth in the February Agreements. LaSalle appeals to this court in June 2004, and GAG files a cross appeal. GAG seeks review of (1) the materiality of the transfer of inventory; and (2) whether GAG owed LaSalle a duty to disclose. LaSalle seeks review of (1) the judgment against LaSalle for the "overfunded amount" despite the Bankruptcy court's finding of fraudulent inducement in the February Letter ...