IN RE BH & P, INC.
| Decision Date | 11 August 1989 |
| Docket Number | 87-00687 and 87-05731.,Bankruptcy No. 86-02263 |
| Citation | 103 BR 556 |
| Parties | In re BH & P, INC., Debtor. In re Philip Alan HERMAN, Debtor. In re Bruce BERKOW, Debtor. |
| Court | U.S. Bankruptcy Court — District of New Jersey |
Gary N. Marks, Ravin, Greenberg & Zackin, P.A., Roseland, N.J., for trustee.
Jeffrey Feld, Cole, Schotz, Bernstein, Meisel & Forman, Hackensack, N.J., for Bederson & Co.
Alvin S. Goldstein, Emmet, Marvin & Martin, New York City, for Bank of New York.
Joseph J. Mania, Office of the U.S. Trustee, Newark, N.J.
This matter is before the court as a result of an objection by the Bank of New York ("BNY"), a creditor, to interim fee applications filed in the BH & P case by Carmen J. Maggio, trustee ("Maggio" or "the trustee"), Ravin, Greenberg & Zackin, P.A., attorneys for the trustee ("Ravin, Greenberg"), and Bederson & Company, accountants for the trustee ("Bederson"). The grounds for the objection include the assertion that the applicants have conflicts of interest which require denial of compensation to them. On April 24, 1989 the court entered an order denying the fee applications without prejudice and scheduling proceedings on the alleged conflicts of interest. Pursuant to that order, certifications and briefs were filed and oral argument was heard on June 12 and 22, 1989. In addition, testimony was taken on June 22, 1989. This opinion shall constitute the court's findings of fact and conclusions of law.
Prior to the filing of its chapter 11 petition on April 14, 1986, BH & P, Inc. ("BH & P"), one of the debtors in these jointly administered cases, was a manufacturer of credit cards and also engaged in direct mailing and telemarketing. The trustee has concluded that the filing was caused primarily by the loss of a lucrative contract under which BH & P provided services to AT & T.
Initially BH & P operated as a debtor in possession. On June 2, 1986 an order was entered authorizing the retention of Ravin, Greenberg as attorneys for the creditors committee. By October, 1986 BH & P had ceased operations and had sold a substantial part of its assets. On November 10, 1986 an order was entered converting the case to chapter 7. That order was stayed pending appeal. The District Court dismissed the appeal, and the United States Trustee appointed Maggio as chapter 7 trustee on January 27, 1987. On February 20, 1987 an order was entered authorizing the trustee to retain Ravin, Greenberg as his attorneys. On March 6, 1987 an order was entered authorizing the trustee to retain Bederson as his accountants.
The two principals of BH & P were Bruce Berkow ("Berkow"), who owned 90% of the stock and was vice president of the corporation, and Philip Alan Herman ("Herman"), who owned 10% of the stock and was president. On February 9, 1987 Herman filed a petition for relief under chapter 7. The United States Trustee appointed Maggio as trustee in the Herman case. The United States Trustee recommended that the trustee retain Ravin, Greenberg as his attorneys, and Bederson as his accountants. Maggio submitted applications to retain the attorneys and accountants in the Herman case, which stated that because of the relationship between the BH & P and Herman cases, the professionals were familiar with the issues which had to be addressed. The application to retain the accountants added that they would investigate irregular transfers of assets and potential causes of action. The professionals and the trustee certified that there would be no conflict of interest in retaining the professionals in the Herman cases. An order was entered on April 20, 1987 authorizing retention of Ravin, Greenberg, and an order was entered on June 29, 1987 authorizing retention of Bederson.
On June 9, 1987 the trustee filed an application for an order authorizing joint administration of the BH & P and Herman cases. The application stated that the debtors' financial affairs were closely related, Herman had interests in entities involved in significant and allegedly questionable business transactions with BH & P, and the creditors of each debtor overlap to a large extent. It was alleged that joint administration would promote convenience and reduce costs of administration. On July 7, 1987 an order was entered authorizing joint administration. The order further provided that it did not constitute substantive consolidation of the estates, and that any party in interest could move for such consolidation, or for modification of the order.
On September 18, 1987, Berkow, the other principal of BH & P, filed a petition for relief under chapter 7. The United States Trustee appointed Maggio as trustee of the Berkow case, and again recommended retention of Ravin, Greenberg as attorneys and Bederson as accountants. The applications to retain the attorneys and accountants in the Berkow case basically repeated the statements which had been made in the applications to retain them in the Herman case, and certifications were again submitted that there would be no conflict of interest. An order was entered on October 27, 1987 authorizing the trustee to retain Ravin, Greenberg. An order was entered on November 13, 1987 authorizing retention of Bederson.
The trustee filed a motion on November 11, 1987 for joint administration of all three cases. The application in support of the motion recited part of the above procedural history and repeated the statements made in the previous application for joint administration of the BH & P and Herman cases. The motion was granted, and an order was entered on December 14, 1987 authorizing joint administration of all three cases, on terms identical to those of the first order for joint administration. Thus, as of December 14, 1987 the BH & P, Herman and Berkow cases were being jointly administered by the same trustee, attorneys and accountants.
The trustee failed to disclose to the court in his applications to retain the professionals in the Herman and Berkow cases or in the applications for joint administration that because of his previous involvement in the BH & P case, he knew from the outset of the Herman and Berkow cases that BH & P had substantial claims against Herman and Berkow, including claims for transfers from BH & P within a year of its bankruptcy petition of approximately $1.7 million into seven real estate tax shelters of which Herman and Berkow were the sole limited partners.1
At the initial hearing on March 23, 1989 regarding the interim fee applications, at which the court denied the applications without prejudice and scheduled a hearing on the conflicts issues, the court specifically directed that certifications were to be filed by the trustee, attorneys and accountants as to any discussions among themselves or with anyone else regarding conflicts. The certification filed by the accountant is silent as to whether there were such discussions, and thus did not comply with the court's order in that regard. The trustee and the attorney filed certifications stating that they recalled a discussion with the United States Trustee at the inception of the Herman case as to whether their involvement in that case would create a conflict with their duties in the BH & P case. Paragraph 18 of the affidavit of Gary Marks, Esq. ("Marks") filed May 15, 1989 states that prior to Ravin, Greenberg's retention as attorneys in the Herman case, Marks had a telephone conference with the Honorable Hugh M. Leonard, United States Trustee, "with respect to potential conflicts of interest which might arise" during the administration of the Herman and BH & P cases. Mr. Leonard stated that this was a common situation, and that it was his policy to move forward with a single trustee and attorney until an actual conflict presented itself. If such a situation developed, a decision would be made as to appointing a substitute trustee and attorney. In Mr. Leonard's view, this approach would balance the need for independent fiduciaries and professionals against the administrative burdens caused where multiple trustees and attorneys may be duplicating each other's efforts. Mr. Leonard has since resigned. His successor, the Honorable Harold D. Jones, Acting United States Trustee, has essentially confirmed that statement of Mr. Leonard's position and adopted it himself in his letter memorandum filed June 2, 1989 in support of the trustee's position on the conflicts issues.
However, no mention is made in the certifications filed by Marks and Maggio as to the reason for the discussion with the United States Trustee regarding conflicts, or as to any further details. The court was not informed of the substance of the conversations regarding conflicts which occurred at the inception of the Herman case until the initial hearing in this matter on June 12, 1989, when I specifically asked Marks whether he knew at that time that BH & P had claims against Herman and Berkow, and whether he had discussed such claims with the United States Trustee. Marks then admitted that he did know of the claims, and did discuss them with Mr. Leonard. Marks reiterated that in his testimony on June 22, 1989.
Mr. Edward Bond ("Bond"), who testified on June 22 on behalf of Bederson and who had previously submitted two certifications on the conflicts issue, noted in his testimony that although he was not aware of the existence of claims by BH & P against Herman and Berkow or of any discussions about them at the inception of the Herman case, another accountant with Bederson, Timothy King ("King"), was primarily responsible for these three cases. Marks testified that although he did not recall any specific discussion with King about the claims in question at that time, he believed there may have been such discussions, and that in any event King probably knew of the claims.2
To summarize the above procedural history regarding disclosure to the court of information regarding conflicts: the...
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