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In re: ) CHAPTER 11
)
PITT PENN HOLDING CO., INC., et al.1, ) Case No. 09-11475 (BLS)
) (Jointly Administered)
Debtors. )
)
)
EMC AEROSOL, LLC n/k/a CC )
PACKAGING, LLC, ) Adversary No. 09-51086
)
Plaintiff, )
)
v. ) Filing Date: July 22, 2010
) Objection Deadline: August 5, 2010
EMC PACKAGING, INC., DEBTOR, ) Reply Deadline: August 12, 2010
) ECF Docket No. 12
Defendant. )
____________________________________)
)
EMC PACKAGING, INC., DEBTOR, )
)
Third-Party Plaintiff, )
)
v. )
)
GEORGE CANNAN, JS REALTY, )
LLC, CAROLINE COSTANTE, )
GEORGE CANNAN, JR. AND )
STACY CANNAN, )
)
Third-Party Defendants. )
____________________________________)
1
The debtors are: Pitt Penn Holding Co. (Case No. 09-11475), Pitt Penn Oil Co. LLC (Case No. 09-11476),
Industrial Enterprises of America, Inc. (Case No. 90-11508), EMC Packaging, Inc. (Case No. 09-11524), Today’s
Way Manufacturing LLC (Case No. 09-11586), and Unifide Industries LLC (Case No. 09-11587), all of which have
been jointly administered.
Defendants and third party plaintiff EMC Packaging, Inc. (“EMC” or “Debtor”) by and
through its undersigned counsel, submits the following in opposition to the motion of plaintiff
JURISDICTION
PARTIES
2. On May 3, 2009 EMC filed a petition for relief under chapter 11, title 11 of the
United States Code (the “Bankruptcy Code”) in the United State Bankruptcy Court for the
District of Delaware, Case Nos. 09-11524. This bankruptcy case has been administratively
consolidated with the bankruptcy of affiliated entities. The jointly administered case is styled In
re: Pitt Penn Holding Co., Inc. et al, Case No. 09-11475 (BLS).
3. Movant Aerosol is, upon information and belief, a limited liability company
organized under the laws of New Jersey and has its principal place of business in New Jersey.
had been an officer and employee of EMC until he was fired for cause on July 14, 2008.
PROCEDURAL HISTORY
5. On August 6, 2008, Cannan commenced an action against EMC and its parent,
IEAI, in the Chancery Division of the Superior Court of New Jersey, Ocean County by order to
show cause and verified complaint seeking alternatively monetary damages or replevin of certain
cylinders (the “Cylinders”) that are the subject matter of this adversary proceeding. On or about
August 8, 2008, Cannan filed an amended complaint, which now included Aerosol as an
alternative plaintiff. EMC and IEAI filed an answer, counterclaim and third party complaint.
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against another former EMC employee and officer, Caroline Costante, as well as EMC’s former
landlord, JS Realty LLC (owned by George Cannan and others) and Mr. Cannan’s two children,
George Cannan, Jr. and Stacy Cannan. Those claims include claims of fraud, breach of fiduciary
duty, conversion, breach of employment agreements and unjust enrichment. The claims are
based on Mr. Cannan’s and Ms. Costante’s unauthorized overpayment of salaries and other
benefits to themselves; unauthorized health insurance payments for George Cannan, Jr. and
Stacy Cannan; unauthorized payments for George Cannan’s and JS Realty’s legal expenses; and
other improper diversions of substantial corporate funds and corporate opportunities. The
plaintiffs and third party defendants filed answers. The pleadings are annexed as Exhibits A
through E.
6. On October 7, 2008, the parties entered into an order in the state court action,
which allowed EMC to sell the Cylinders which plaintiffs were claiming and which required
EMC to deposit $30 per cylinder into its attorneys’ trust account pending the resolution of what
was now simply a monetary dispute. [A copy of that order is annexed as Exhibit A to Aerosol’s
motion.] By virtue of agreeing to this order, Cannan and Aerosol waived and surrendered any
and all claims they otherwise may have had to any right of possession or title to the subject
Cylinders. As the only remaining issues involved monetary claims, the matter was transferred to
the Law Division of the Superior Court, Ocean County, Docket No. OCN-L-3559-08.
7. After the filing of their bankruptcy petitions, EMC and IEAI removed the state
court action to the District of New Jersey. The case was then transferred to the District Court for
the District of Delaware and then referred to this Court where it is pending as an adversary
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8. Only Aerosol filed the instant adversary seeking relief as to the Cylinders.
Cannan has apparently abandoned his claim to the Cylinders. As the adversary complaint
contains the same claims that Aerosol asserted in the state court action, EMC has asserted the
same claims that it made in its counterclaim and third party complaint in the state court action.
Aerosol and the third party defendants have filed answers to those claims.
9. In this adversary proceeding, and in the underlying state court actions, Aerosol
has asserted that it has the right to purchase 9,000 Arctic Air Cylinders from EMC pursuant to a
purchase agreement dated March 26, 2008, negotiated by Cannan, while he was president of
EMC, and James W. Margulies, the president of IEAI, the parent of EMC. It is EMC’s position
that the Purchase Agreement was a product of a fraud perpetrated by Cannan on EMC. A copy
of the Purchase Agreement is annexed as Exhibit F. The Court should be aware that Mr.
Margulies has been indicted in the Supreme Court of the State of New York, County of New
York for his frauds in connections with EMC and its related entities. A copy of the indictment is
annexed as Exhibit G. Upon information and belief, Mr. Cannan is either unindicted co-
conspirator 5 or 6 identified at page 11, paragraphs 11 and 12 of the Sixth Count of the
indictment, as he is one of two individuals who received identical amounts of stock on the same
day.
10. Title to the cylinders never passed to Aerosol, which merely had an agreement to
purchase 9000 unidentified Arctic Air cylinders. There is no bill of sale or other document
identifying particular cylinders to the Purchase Agreement. Thus title to goods did not pass
under a contract for sale prior to their identification to the contract. N.J.S.A. §§ 12A:2-401,
12A:2-501(1).
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11. The Purchase Agreement did not create a security interest in any cylinders owned
by EMC. As far as EMC is aware, neither Cannan nor Aerosol filed financing statements as to
their purported interest in the Cylinders prior to the Petition Date. Thus, as of the Petition date,
Aerosol was only an unsecured creditor of EMC, which in turn had substantial claims against
Aerosol and its principals, Cannan and his son, George Cannan, Jr.
12. Any purported claim that Aerosol may assert against the Cylinders is subject to
the interest of senior secured creditors. At the time that the parties entered into the consent order
in the state court action, Sovereign Bank had a blanket security interest on all of EMC’s assets,
including the cylinders. Pursuant to cash collateral orders entered by this Court on notice to all
creditors, the validity, priority and amount of the senior lien of Sovereign has been fixed and
secured by liens on all of the debtors’ assets, whether acquired before or after the filing of the
petitions in this case. (Sovereign was under secured so that Aerosol could not claim a junior
purchased the note held by Sovereign and provided debtor in possession (“DIP”) financing. By
order entered on February 16, 2010 this Court approved the final order for the second round of
DIP financing provided by Omtammott II, LP, which is affiliated with Omtammott LLC. Under
the terms of that financing agreement, the DIP lender has subrogated to the secured position of
Sovereign Bank and continues to have a senior security interest in all of EMC’s assets.
13. Although the purchase agreement upon which Aerosol relies refers to 9,000
cylinders, it is undisputed that as of the time that the parties entered in the consent order EMC
had only approximately 7,000 of the Cylinders in its possession. Of that amount approximately
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3,000 were sold shortly before the Petition Date. (A summary of the sales of the Cylinders is
annexed as Exhibit H.) Pitt Penn Holding, Inc. (“PPH”) was acting as sales agent for EMC. The
proceeds from the pre-petition sales were deposited into PPH’s operating account. Sovereign, as
it had the right under its loan agreement, swept the account and applied the funds to its debt. The
remainder of the Cylinders were sold post petition in the ordinary course of business. Under the
terms of the cash collateral orders entered by this Court, the proceeds of the sale of inventory,
which constitute cash collateral, were subject to the replacement and super priority liens of
14. In sum, Aerosol’s application for an accounting is moot. The Cylinders have
been sold in the ordinary course of business and the proceeds of those sales were and remain
subject to the claims of senior secured creditors. As of the Petition Date, Aerosol had only an
unsecured claim against EMC, which was and remains subject to EMC’s substantial claims
15. Aerosol’s contention that the sales were not reported in the monthly operating
reports is incorrect. The operating reports do not require line item descriptions of items sold, just
revenues from operations. For example, the April 2010 operating report for EMC identified
$160,600 in gross revenues which represents the sales of Cylinders for that month. The earlier
post petition sales may have been listed in the operating reports for the lead debtor, Pitt Penn
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WHEREFORE, EMC respectfully requests that the Court deny Aerosol’s motion.
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VERIFICATION
I am the president of debtor in possession EMC Packaging, Inc. I have read the
foregoing Opposition to Motion of EMC Aerosol, LLC n/k1a CC Packaging, LLC. As to the
factual statement made in this opposition, I state that they true to the best of my knowledge,
information and belief, my information and belief being based upon the books and records of the
debtor.