S & P, INC. v. Pfeifer
| Citation | 189 BR 173 |
| Decision Date | 03 October 1995 |
| Docket Number | No. 3:95cv266 AS.,3:95cv266 AS. |
| Parties | S & P, INC., Plaintiff-Appellant, v. Daniel H. PFEIFER and Sweeney, Pfeifer & Blackburn, Defendants-Appellees. |
| Court | U.S. District Court — Northern District of Indiana |
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Patrick D. Murphy, Barnes and Thornburg, South Bend, IN, Mark J. Phillipoff, Jones Obenchain Ford Pankow and Lewis, South Bend, IN, for plaintiff-appellant.
Don G. Blackmond, John C. Hamilton, Doran Blackmond Ready Hamilton and Williams, South Bend, IN, for defendants-appellees.
Plaintiff-Appellant S & P, Inc. ("S & P") appeals from a final judgment of the United States Bankruptcy Court awarding damages of $14,391 to S & P. S & P challenges the bankruptcy court's finding that S & P's reorganization as an ongoing concern would not have been possible, and asserts that (a) the bankruptcy court exceeded the Seventh Circuit's mandate on remand; and (b) S & P's original damages calculations were and are accurate. This court has jurisdiction over S & P's bankruptcy appeal pursuant to 28 U.S.C. § 158(a).
In March 1988, S & P brought a malpractice suit against its attorney, Daniel H. Pfeifer, and his law firm, Sweeney, Pfeifer & Blackburn, who were representing S & P in Chapter 11 proceedings. The suit alleged that S & P was evicted without notice from its leased premises and forced to close and liquidate its restaurant business as a result of the attorney's misconduct. On October 21, 1992, the United States Bankruptcy Court for the Northern District of Indiana, Robert K. Rodibaugh, Judge, found that the attorney and his firm had committed professional malpractice and awarded money damages of $14,391, including $11,000 in actual damages and prejudgment interest in the amount of $3391.
S & P filed a motion to amend the bankruptcy court's findings and judgment, alleging that erroneous findings of fact had led the court to incorrectly conclude that a successful reorganization of S & P pursuant to 11 U.S.C. § 1129 would not have been possible. The bankruptcy court denied S & P's motion, and S & P appealed to the United States District Court for the Northern District of Indiana. The district court affirmed the decision of the bankruptcy court, and S & P subsequently appealed to the United States Court of Appeals for the Seventh Circuit. In an unpublished order dated May 6, 1994, the Court of Appeals reversed the bankruptcy court's decision, finding two of the court's determinations on the issue of damages to be clearly erroneous. The Seventh Circuit remanded the case to the bankruptcy court to determine whether reorganization of S & P would have been possible, and whether S & P's damages calculations were accurate.
On remand, the bankruptcy court found that, under either of two different scenarios, reorganization of S & P would have been impossible, and therefore concluded that the original damages of $14,391 awarded to S & P in the court's original order were correct and proper. Bankr.Ord. (Feb. 24, 1995) at 28. S & P appeals to this court on the grounds that (a) the bankruptcy court exceeded the Seventh Circuit's mandate on remand; (b) S & P's reorganization would have been possible; and (c) S & P's damages calculations were and are accurate. This court heard oral argument on August 24, 1995.
Plaintiff-Appellant S & P formerly did business as the Big Bear Restaurant (the "Big Bear") in Mishawaka, Indiana. S & P was incorporated under the laws of Indiana on January 12, 1978. In 1986, S & P opened another restaurant in Elkhart, Indiana, called Chef Willie's, which proved to be unsuccessful and closed within a year. Although the Big Bear Restaurant allegedly continued to be a profitable business,1 S & P found itself in financial straits by 1987 due to liability for past-due withholding and FICA taxes from the failed Chef Willie's venture, as well as a rent dispute with the lessor of the property on which the Big Bear was operated.2 In early 1987, S & P hired attorney Daniel H. Pfeifer and his law firm, Sweeney, Pfeifer & Blackburn, to represent the company's interests in various legal matters. In August of that year, S & P, unable to resolve its financial difficulties, authorized Mr. Pfeifer to file a petition for relief on its behalf under Chapter 11 of the Bankruptcy Code (the "Code").
S & P alleges that it intended to use future profits generated by the Big Bear Restaurant to satisfy its pre-petition obligations. However, Mr. Pfeifer failed to advise S & P that pursuant to § 365 of the Code, the company's unexpired, ten-year commercial lease would terminate as a matter of law unless S & P filed a motion to assume the lease within sixty days of the order of relief. Under § 365, if a debtor fails to assume or reject the lease within sixty days, or to petition the court for an extension of time, the debtor must immediately surrender the property upon order of the bankruptcy court.
As a result of Pfeifer's failure to advise S & P of this requirement or to seek the bankruptcy court's authorization to assume the lease, S & P was required to surrender the restaurant property. Having failed to assume the lease, S & P also lost its option to renew the lease in January of 1988. After the bankruptcy court entered an order directing immediate surrender, the property owner gave S & P five days to vacate the premises, thereby forcing S & P to cease operation of the Big Bear and liquidate its inventory. S & P subsequently retained new counsel and filed its malpractice suit against Pfeifer and his law firm, Sweeney, Pfeifer & Blackburn.
After trial, the bankruptcy court determined that Pfeifer had breached his professional duty to S & P by failing to exercise ordinary care, skill, and diligence under the circumstances. Specifically, the court found "a surfeit of evidence that Pfeifer and his law firm failed to follow proper procedures or adequately advise their client concerning the bankruptcy proceeding." Bankr.Ord. (Oct. 21, 1992) at 16.
The bankruptcy court stated that the true measure of damages was the value of the Big Bear Restaurant as an ongoing reorganized business. Id. at 17. In calculating damages, the court focused on the five-month period from September 1, 1987, to January 31, 1988, during which S & P operated the Big Bear as debtor-in-possession. Id. at 21-23. Because the bankruptcy court concluded that S & P did not sustain its burden of proving that there was a reasonable possibility of a successful reorganization for S & P to lose, id. at 16, the court awarded no damages for the loss of the restaurant itself, but instead awarded damages only for the value of Pfeifer's retainer ($5000), the cost of lost inventory ($2000) given away during S & P's hasty eviction from the premises, and the value of new menus ($4000) ordered shortly before S & P was forced to close the Big Bear. Id. at 25-26. The bankruptcy court also awarded pre- and postjudgment interest. Id. at 27-28.
On appeal from the district court's affirmance of the bankruptcy court decision, the Court of Appeals for the Seventh Circuit concluded that two of the bankruptcy court's original findings were clearly erroneous. First, the Court of Appeals found that the bankruptcy court had incorrectly used the figure for cash on hand at the beginning of January 1988 as the amount on hand as of January 31, 1988. In re S & P, Inc., No. 93-3066, 1994 WL 175415 (7th Cir. May 6, 1994) (remand order) at 4. The bankruptcy court's use of the wrong figure for cash on hand at the end of January effectively reduced the amount of cash S & P had accumulated from September 1, 1987, to January 31, 1988.
Second, the Court of Appeals concluded that the bankruptcy court had erred by using the wrong monthly rent figure in its damages calculations. Notwithstanding that S & P's lease agreement provided for percentage rent over and above the base rate used by the bankruptcy court, and despite the fact that defense exhibits — upon which the bankruptcy court had relied for its cash on hand and total cash receipts figures — clearly showed that S & P was paying between $5047.40 and $5113.72 per month, the bankruptcy court nonetheless had determined that there was insufficient evidence to support a finding that S & P was paying more than $2200 base rate in building rent during the relevant five-month debtor-in-possession period. The Court of Appeals found that it was clear error for the bankruptcy court to disregard the figures for monthly building rent paid. Id. at 5.
The Seventh Circuit reversed the bankruptcy court's original decision and remanded the case to the bankruptcy court "for reconsideration of damages." Id. at 6. Specifically, the Court of Appeals remanded the case with the following instructions:
We leave it to the bankruptcy court to determine on remand whether reorganization would have been possible and whether S & P\'s damages calculations are accurate, using the proper figures for the cash on hand on January 31, 1988, and the correct amount of rent paid. Should the court determine that reorganization would have been possible, we agree with the bankruptcy court that S & P should be awarded damages equal to the value of the Big Bear Restaurant.
Id. at 5-6. On remand, the bankruptcy court, using figures found by the Court of Appeals to be proper for the cash on hand on January 31, 1988, and the amount of rent paid, again determined that reorganization of S & P would not have been possible. Bankr. Ord. (Feb. 24, 1995) at 17-18. This time, however, instead of returning to its original calculation using the five-month debtor-in-possession period as a basis for determining damages, the bankruptcy court focused on an earlier period of S & P's operation (1983-85) in its damages calculations. Id. at 20. In its order on remand, the bankruptcy court concluded that reorganization would have been...
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