In re Labrum & Doak, LLP
| Citation | 227 BR 383 |
| Decision Date | 19 November 1998 |
| Docket Number | Bankruptcy No. 98-10215DAS,Adversary No. 98-0393. |
| Parties | In re LABRUM & DOAK, LLP, Debtor. OFFICIAL COMMITTEE OF FORMER PARTNERS, Plaintiff, and Official Committee of Unsecured Creditors, Intervening Plaintiff, v. Michael G. BRENNAN, et al., Defendants. |
| Court | United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania |
Neal Colton, Philadelphia, PA, for debtor.
Paul J. Winterhalter, Philadelphia, PA, for Official Committee of Former Partners.
Aris Karalis, Ciardi, Maschmeyer & Karalis, P.C., Philadelphia, PA, for Official Committee of Unsecured Creditors.
Robert Lapowsky, Wayne, PA, for Parsells, Carr, Neeson, Springer, and Salmon.
Robert Szwajkos, Fox, Rothschild, O'Brien & Frankel, Philadelphia, PA, for Barbara Hollenbach.
Michael Menkowitz, Fox, Rothschild, O'Brien & Frankel, Philadelphia, PA, for Kean McDonald.
Gary Bressler, Pelino & Lentz, PC, Philadelphia, Pa, for John Lucey.
James E. O'Neill, III, Stradley, Ronon, Stevens & Young, Philadelphia, PA, for Robert Stern.
Howard Cyr, Harvey, Pennington, Herting & Renneisen, Ltd., Philadelphia, PA, for Leslie Cyr.
Robert J. LaRocca, Philadelphia, Pa, for Ryan Brown Firm.
Frederic Baker, Ass't U.S. Trustee, Philadelphia, PA, for United States Trustee.
The instant adversary proceeding ("the Proceeding") is an action brought by the Official Committee of Former Partners ("the PF Committee") of a dissolved law firm which is a chapter 11 debtor, LABRUM & DOAK, LLP ("the Debtor"), joined by the intervening Official Committee of Unsecured Creditors ("the UC Committee;" with the FP Committee, "the Plaintiffs"). Therein, the Plaintiffs seek to avoid distributions made by the Debtor to its partners within one year before the commencement of the Debtor's bankruptcy case, pursuant to 11 U.S.C. §§ 547(b) and 548(b). Proof of the Debtor's insolvency, which is a necessary element of claims under both of these statutes, is dependent upon our accepting the balance sheet calculations of the Plaintiffs' expert accountant. These calculations designated the entire amount of the Debtor's "contingent lease payables," principally regarding leases which were to extend for many years after the Debtor's dissolution, as liabilities. Since we cannot accept this calculation as a reasonable estimate of actual indebtedness for these obligations, we find that the Plaintiffs have not met their burden of proving the Debtor's insolvency. Accordingly, judgment will be entered against the Plaintiffs.
As we noted in our very recent Opinion of November 13, 1998, approving, for the most part, a Chapter 11 plan submitted by the UC Committee in this case ("the Confirmation Opinion"), this case has been "contentious" and marked by a significant volume of litigation. The Opinions published in the Bankruptcy Reporter to date include a decision of August 14, 1998, allowing the Debtor to obtain a quantum meruit recovery of the fees ultimately received by its former attorneys who took contingent-fee cases with them, at 225 B.R. 93 ("the August Opinion"); and a decision of July 30, 1998, allocating tax recapture liability arising from the lease of the Debtor's Philadelphia office among its former as well as its present partners, at 222 B.R. 749 ("the July Opinion"). To be published in Bankruptcy Reporter in addition are a Supplement to the August Opinion fixing the Debtor's share of the contingent fees, presently reported only at 226 B.R. 161; and the Confirmation Opinion, too recent to be published anywhere.
The genesis of this particular Proceeding was a motion filed by the FP Committee on June 1, 1998, seeking permission to file this suit in light of the reluctance of the Debtor to institute it. On July 8, 1998, that motion was granted and the Complaint was filed on July 15, 1998. After a consensual continuance of the original trial date of September 2, 1998, to October 14, 1998, the Proceeding was tried on the latter date. The UC Committee was granted permission to intervene in the Proceeding as a party plaintiff on the date of trial.
We note the Proceeding was mentioned briefly in the July Opinion as a potential vehicle for the former partners to recover for alleged depletion of the Debtor's tax reserve accounts by the present partners. 222 B.R. at 753, 762. However, that depletion was not in fact referenced in any sense in this litigation and it was therefore not utilized in this capacity.
Named as Defendants in the Proceeding were twenty-four (24) attorneys who allegedly received distributions as partners of the Debtor within a year of the involuntary petition which commenced this case on January 6, 1998. The payments included 1996 income distributions in early 1997 ranging from below $10,000 to more than $100,000 per partner, plus periodic 1997 income distributions between January 1997 and May 1997, usually in amounts of $1000 and $1923.08. Total distributions to "full" partners ranged from $23,076.96 (Defendant BLANCK) to $231, $175.37 (Defendant SALMON). Most were clustered around $100,000.
Five so-called "equity partners," Defendants BROWN, CAROLAN, GREYSTONE, JORDAN, and TOBIN, were voluntarily dismissed as parties prior to the commencement of the trial. It is reported that Defendants BRENNAN, ESTRIN, GRACE, HAUSCH, RITCHIE, and CARR filed personal bankruptcies of their own prior to trial, resulting in a stay of the Proceeding as to them. All of the other Defendants answered the Complaint. Several Defendants, notably the equity partners since dismissed from the case, filed Cross-claims against others. Defendants CYR, HOLLENBACH, LUCEY, McDONALD, and STERN testified at trial.
Witnesses called by the Plaintiffs included retired partner Daniel J. Ryan and withdrawn partner Jonathan D. Herbst; Anthony Calascibetta, whose firm, Kahn Consulting, Inc. ("KCI"), collected data pertaining to the partners' individual financial circumstances as of June 1998; J. Daniel Jones, the Debtor's accountant; and Stephen Scherf, the Plaintiffs' expert accountant. The Defendants called, in addition to the five of their number named above, Joseph Klein, the Debtor's former controller; and Diane Strack, the Debtor's "dissolution administrator." They did not call an expert in response to Scherf. Upon the completion of the trial, which consumed about eight hours, the parties were accorded until October 28, 1998 (the Plaintiffs), and November 4, 1998 (the Defendants), to render post-trial submissions.
Calascibetta testified that the KCI report indicated that the Debtor's partners had total net assets of but $41,000. Jones was called mostly to identify certain documents, although, to the surprise of the Plaintiffs, it was brought out in cross-examination that he had performed a draft solvency analysis for the Debtor in May 1998 which recited that the Debtor had assets of $8,405,699 and liabilities of only $4,815,168 and hence was comfortably solvent as of January 31, 1997, as well as of December 31, 1996. Scherf, meanwhile, recorded a liability of $14,025,707 on account of the Debtor's future lease obligations as of December 31, 1996, which was decreased only to $13,537,849 as of May 1997. While Scherf was unable to break this figure down, he stated that it was the sum of all past and future rentals due on the Debtor's leased office spaces in Philadelphia, West Chester, Norristown, and Bethlehem, PA; Mt. Laurel, NJ; and New York City, plus rentals due on equipment leases. Scherf's asset valuation ranged from nearly $10 million on December 31, 1996 to slightly less than $8.9 million in May 1997, while liabilities other than future rents ranged from about $3.1 million on December 31, 1996, to about $4.4 million in May 1997. In his analysis, Jones, upon instructions from the Debtor's counsel on this point, had measured the Debtor's lease obligations by the amount of current rental payments due for a period of one year, stated as $850,000.
Klein testified that the Debtor at all times paid all of its obligations as they came due, with the exception of retirement or withdrawal obligations to former partners, which ceased in early 1997. Strack's records indicated fees billed by all of the Debtor's partners for the period from January through July 1997, which were far in excess of the distributions paid. McDonald testified that the Debtor had not drawn at all on an available $3 million line of credit as of February 14, 1997, the time that he resigned as a partner of the Debtor. Hollenbach testified to her successful negotiations to trade to the Bethlehem office landlord certain furniture on location in exchange for elimination of any future rent payments due. All of the Defendants credibly testified that they believed that the Debtor was solvent at all times prior to its dissolution and that they performed services through July 31, 1997, worth considerably more than the distributions which they received, which ceased in May 1997.
The witnesses other than the Defendants were likewise credible. However, it became obvious that a critical aspect of the Plaintiffs' case was whether Scherf, though acting in good faith, was in fact correct in calculating all of the Debtor's substantial total future rent obligations as present liabilities of the Debtor.
The principal statutory basis of the Plaintiffs' case is 11 U.S.C. § 548(b), which thusly allows the avoidance, as a "constructive" fraudulent conveyance, of transfers to partners by a debtor partnership:
(b) The trustee of a partnership debtor may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the...
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