In re V & M Management, Inc.

• Decision Date: 08 December 1997
• Docket Number: Bankruptcy No. 96-10123-CJK.
• Parties: In re V & M MANAGEMENT, INC., Debtor.
• Court: United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts

215 B.R. 895 (1997)

In re V & M MANAGEMENT, INC., Debtor.

Bankruptcy No. 96-10123-CJK.

United States Bankruptcy Court, D. Massachusetts.

December 8, 1997.

Judith Dein, Boston, MA, for Winter Hill Federal Savings Bank.

Paul Moore, for Chapter 11 Trustee.

Saul Shapiro, for BRA.

Paul Ricotta, Boston, MA, for Beacon Residential Properties Limited Partnership.

Kirk Jackson, Roxbury, MA, for Mandela Residents Cooperative Association, Inc.

Harold Murphy, for himself and Hanify & King, P.C.

Jeffrey Ogilvie, for MDOR.

Constantine Papademetriou, for City of Boston.

MEMORANDUM OF DECISION ON CREDITORS' JOINT MOTION FOR EMERGENCY STAY, REVOCATION OF ORDER CONFIRMING PLAN, RETROACTIVE REMOVAL OF TRUSTEE, AND VACATUR OF FEE ORDERS

CAROL J. KENNER, Chief Judge.

Certain creditors of this estate — Victor Aronow, Chardon Financial Services, Matthew Mallen, Gary Leroy, Arthur Goldsmith, Georgette Maalouf, Alphonse and Noha Simon, Edward Mourad, and Habib Mourad¹ — have moved for (1) revocation of the order confirming the Joint Plan of Reorganization in this case ("the Plan"); (2) a stay of the confirmation order pending resolution of the motion to revoke; (3) retroactive removal of Stephen S. Gray as Chapter 11 Trustee in this case; (4) vacatur of the orders approving the fee applications of Stephen S. Gray as Chapter 11 Trustee and of Hanify & King as Debtor's counsel and return of their fees to the estate; (5) dismissal of this case; and (6) return of "the property" (presumably, the movants mean the Debtor's real estate, a 276-unit apartment complex) to the Debtor. The basis for all this relief is the movants' allegations, based on newly discovered evidence, that while the firm of Hanify & King remained counsel to the Debtor in this case, Stephen Gray, who is the Chapter 11 Trustee in this case, hired Hanify & King ("H&K") to represent him in his capacity in another Chapter 11 case; and neither Gray nor the firm disclosed that relationship to the Debtor, the creditors, and the Court in this case. The movants contend that Gray's undisclosed retention of Hanify & King created a conflict of interest that tainted the plan, and that the taint can be remedied only by revoking the order of confirmation.

The motion has drawn four objections: one from Stephen Gray, as Chapter 11 Trustee; another from Hanify & King; a third filed jointly by Winter Hill Federal Savings Bank, Beacon Residential Properties Limited Partnership, the Mandela Residents Cooperative Association (all of whom were proponents of the confirmed plan) and the Boston Redevelopment Authority (the "Joint Objection" of the "Plan Proponents"²); and a fourth filed by the City of Boston and the Commissioner of the Massachusetts Department of Revenue. The objections cite numerous defects in the motion, both procedural and substantive.

As a preliminary matter, the Plan Proponents request an early decision of the portions of the motion that seek to revoke the confirmation order and to stay that order pending adjudication. In support, they state that the mere pendency of the motion may affect the complicated financing arrangements that are a critical part of the approved Chapter 11 plan. The closing of the financing is imminent; if the closing were delayed beyond December 31, 1997, consummation of the plan — including transfer of the real estate and the payment of substantial dividends to all creditors — would be seriously jeopardized. For this reason, the Court agrees that these portions of the motion warrant expedited treatment and, if necessary, separate adjudication from the rest of the motion.

The movants seek principally to revoke the order of confirmation. A proceeding to revoke an order of confirmation is an adversary proceeding and as such is governed by the rules of Part VII of the Federal Rules of Bankruptcy Procedure. Fed. R.Bankr.P. 7001(5). Among other things, the proceeding must be commenced by complaint. Fed.R.Civ.P. 3, made applicable by Fed.R.Bankr.P. 7003. The movants have filed only a motion, not a complaint. To remedy this deficiency — cited as one ground for objection to the motion — the movants requested that their motion be treated as a complaint and that they be granted leave to amend their complaint to put it in proper form. With the assent of the objecting parties, the Court allowed the request to treat the motion as a complaint. Accordingly, the Court will treat the motion as a complaint and, to the extent that the objections argue that the complaint fails to state a claim on which relief can be granted, will treat the objections as motions to dismiss. Leave to amend will be subject to resolution of the motions for dismissal.

The Joint Objection of the Plan Proponents contains what might properly be characterized as a Rule 12(b)(6) motion with respect to the demand for revocation. The Plan Proponents argue that the request for revocation should be dismissed because "it fails to allege legally sufficient grounds for revoking the Confirmation Order." Citing § 1144 of the Bankruptcy Code, they point out that the court may revoke an order of confirmation "only if such order was procured by fraud." 11 U.S.C. § 1144 (emphasis added).³ They contend the complaint nowhere contains even an allegation of fraud, and that none of its allegations makes any reference or has any relevance to the findings made in the confirmation order. At most, they argue, the allegations may have bearing on the fee awards to Stephen Gray and Hanify & King; they have no relevance to the confirmation order.

In essence, this is an argument for dismissal under Fed.R.Civ.P. 12(b)(6). A motion under this rule tests the legal sufficiency of the complaint, not the evidence to support it. Accordingly, for purposes of this motion, the court must accept all well-pleaded facts as true and draw all reasonable inferences in favor of the party to be dismissed. Carreiro v. Rhodes Gill and Co., Ltd., 68 F.3d 1443, 1447 (1st Cir.1995). However, because only well-pleaded facts are taken as true, the court need not accept a complainant's unsupported conclusions or interpretations of law. Id.; Washington Legal Foundation v. Massachusetts Bar Foundation, 993 F.2d 962, 971 (1st Cir.1993); United States v. AVX Corp., 962 F.2d 108, 115 (1st Cir.1992) ("a reviewing court is obliged neither to `credit bald assertions, periphrastic circumlocutions, unsubstantiated conclusions, or outright vituperation,' . . . nor to honor subjective characterizations, optimistic predictions, or problematic suppositions" (citations omitted)). "A claim will be dismissed only if plaintiffs are not entitled to relief under any set of facts they could prove, within the scope of the complaint." Redgrave v. Boston Symphony Orchestra, Inc., 557 F.Supp. 230, 233 (D.Mass.1983), citing Harper v. Cserr, 544 F.2d 1121, 1122 (1st Cir.1976).

As the Plan Proponents contend, the Bankruptcy Code strictly limits the grounds on which an order confirming a Chapter 11 plan may be revoked: "the court may revoke such order if and only if such order was procured by fraud." 11 U.S.C. § 1144 (emphasis added). The Bankruptcy Code does not define "fraud" for purposes of this section, and its meaning in this section is neither well settled nor easily formulated. The cases generally do not limit the term to common law fraud; though they use common law fraud as a starting point, they do not demand strict satisfaction of its requirements concerning reliance and damages. See, for example, In re Kostoglou, 73 B.R. 596, 598-599 (Bankr.N.D.Ohio 1987) (reliance by a creditor need not be shown if the court relied on the false representation and a creditor or other party was damaged thereby). In Kostoglue, the court stated:

The term fraud has never been given a precise definition for fear that the craft of men should find ways of committing fraud which might evade such a definition. . . . We do know that the term includes any "deceit, artifice, trick or design . . . used to cheat another — something said or done or omitted with the design of perpetrating a cheat or deception." Black\'s Law Dictionary, 541 (Rev. 5th Ed.1979). We also know that "fraud" requires proof of bad faith, immorality or intentional wrongdoing, Byrd v. Byrd (In re Byrd), 9 B.R. 357 (Bankr.D.D.C.1981). In the end, determinations of the existence of "fraud" must be made on the specific facts of each case with a view to whether, in each case, the requisite fraudulent intent has been shown.

In re Kostoglou, 73 B.R. at 598-599. The court further held that fraud in § 1144 was not limited to fraud on the court or to extrinsic fraud (fraud extrinsic to the matter tried before the court). "As a matter of law, we think that it encompasses any action in a bankruptcy proceeding by which a party obtains confirmation of a plan by deceptive practices with a deceptive intent." Id. at 599. See also In re Michelson, 141 B.R. 715, 724-725 (Bankr.E.D.Cal.1992) (tracing history of "procured by fraud" and holding that "any fraud will suffice").

FACTS

Using Kostoglou as the starting point, I turn to the well-plead facts of the complaint and the inferences to be drawn from them, as augmented by facts of record in the case. The sequence of events is relevant to understanding the facts alleged.

The Debtor, V&M Management, Inc., commenced this case on January 8, 1996. The Debtor's principal asset was a 276-unit low-income apartment complex that, under Massachusetts law, G.L. c. 121A, constituted an urban renewal project under the supervision and regulation of the Boston Redevelopment Authority (BRA). The Debtor's business was the ownership and management of this apartment complex. On February 1, 1996, the BRA, together with the City of Boston and the Commissioner of the Massachusetts Department of Revenue (collectively, the "Governmental Entities"), moved for the appointment of a Chapter 11 Trustee in the case; the motion was based on allegations that the Debtor had been grossly mismanaged by...