In re L & S Industries, Inc., Bankruptcy No. 81 B 14558
| Decision Date | 09 January 1991 |
| Docket Number | Adv. No. 90 A 0628.,Bankruptcy No. 81 B 14558 |
| Citation | 122 BR 987 |
| Parties | In re L & S INDUSTRIES, INC., Debtor. Elaine T. WILLIAMS, Executor of the Estate of Gary Williams, Plaintiff, v. Lawrence J. STEFAN, Judith Stefan and L & S Industries, Inc., Defendants. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
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Ralph E. Brown, Judith L. Borden, Schuyler, Roche & Zwirner, Chicago, Ill., for plaintiff.
Richard W. Hillsberg, Tishler & Wald, Chicago, Ill., for defendants Stefans.
David E. Cohen, Cohen & Krol, Chicago, Ill., for defendant L & S Industries, Inc.
FINDINGS OF FACT AND CONCLUSIONS OF LAW ON PLAINTIFF'S MOTION FOR PRELIMINARY INJUNCTION AND STEFANS' MOTION FOR ABSTENTION
Plaintiff Elaine T. Williams ("Plaintiff"), Executor of the Estate of Gary Williams ("Williams"), has moved to enjoin Lawrence J. Stefan and Judith Stefan (the "Stefans"), along with Debtor L & S Industries, Inc. ("Debtor", "L & S")1 (collectively the "Defendants"), from prosecuting various counterclaims and affirmative defenses in an action initiated by Plaintiff which is pending in the Circuit Court of Cook County, Illinois, Law Division, No. 83L4090 (the "State Court Action") ("Plaintiff's Motion"). The Stefans have moved this Court to abstain from hearing this matter.
Trial was held on the Motion for Preliminary Injunction and the Motion for Abstention. Evidence was admitted and final argument heard. The Court now makes and enters the following Findings of Fact and Conclusions of Law:
FINDINGS OF FACT
The following facts are stipulated, otherwise uncontested, or are part of the record of proceedings herein:
1. On November 6, 1980, Gary Williams entered into an agreement with L & S and Lawrence Stefan ("Agreement"). At the time of the Agreement, Gary Williams held shares of L & S individually and as trustee under a Declaration of Trust. Gary Williams cumulatively held 500,000 shares which represented fifty percent of the outstanding shares of L & S.
2. At the time of the Agreement, Lawrence Stefan was secretary of L & S. He and his wife, Judith Stefan, were two of its directors. Gary Williams was president of L & S while his wife, Elaine Williams, was treasurer. Both of the Williams's were also directors.
3. The Agreement provided that Gary Williams would sell all of his stock in L & S: 416,666 shares to L & S and 83,334 shares to Lawrence Stefan. The Stefans were personally and unconditionally to guarantee payment of a promissory note dated November 20, 1980 in the amount of $750,000 payable by L & S to Gary Williams ("Note").
4. The Note provided for payment of the purchase price in three equal installments of $250,000, plus accrued interest, the first installment being due one year from the closing date of November 20, 1980.
5. The Agreement was executed and the Note was delivered to Gary Williams by L & S. Pursuant to the Agreement, the Stefans delivered to Gary Williams their personal written guaranty, guaranteeing payment of the indebtedness of L & S as evidenced by the Note.
6. Debtor failed to pay the first installment due under the Note on November 21, 1981.
7. On November 23, 1981, L & S filed a petition for relief under Chapter 11 of the U.S. Bankruptcy Code ("Code"). At the time of the filing, Lawrence Stefan remained president, director, and sole shareholder of Debtor, while Judith Stefan remained an officer and director.
8. On May 4, 1982, Gary Williams filed an adversary complaint in the bankruptcy proceeding, No. 82 A 1620, seeking in part to modify the automatic stay pursuant to Section 362(d) of the Code in order to pursue his claims against the Defendants pursuant to the Note ("Adversary Proceeding").
9. Neither Lawrence Stefan nor Judith Stefan was named as a party in the Adversary Proceeding, nor did they file appearances.
10. At all times during the Adversary Proceeding, Lawrence Stefan was sole shareholder of Debtor, and he and Judith Stefan were officers and directors.
11. Debtor filed an answer, affirmative defenses, and counterclaims in the Adversary Proceeding, all of which were based substantially upon the alleged wrongful conduct of Gary Williams.
12. While the Adversary Proceeding was pending, in 1983 Gary Williams filed the State Court Action against the Stefans to enforce the Stefans' guaranty of the Note. Debtor intervened in the State Court Action as an additional defendant-counterplaintiff, and both the Debtor and Stefans filed affirmative defenses and counterclaims in the State Court Action. The various affirmative defenses and counterclaims were based substantially upon the alleged wrongful conduct of Gary Williams individually and through his agents. In the State Court Action, Debtor and the Stefans have been represented at all times by the firm of Peck & Wolf.
13. With respect to their affirmative defenses and counterclaims, the Defendants' allegations included the following: that Gary Williams fraudulently induced Defendants to enter into the Agreement via false representations; that Gary Williams had concealed acts of mismanagement and accompanying financial loss with regard to Debtor; that Gary Williams unfairly competed with Debtor and employed wrongful methods in doing so; that as a result of the wrongful conduct, Debtor was unable to fulfill its obligations under the Note; and, that Gary Williams' conduct constituted a breach of fiduciary duties owed to Debtor and its directors, fraud, breach of the express terms of the Agreement, tortious interference with existing contractual relations, and unfair competition.
14. The affirmative defenses and counterclaims asserted by Debtor in the Adversary Proceeding arose out of the same transactions as those affirmative defenses and counterclaims filed by the Stefans and Debtor in the State Court Action.
15. The bankruptcy case was converted to a Chapter 7 proceeding on May 15, 1985. The following day Lawrence M. Cooper was appointed Trustee ("Trustee").
16. During the pendency of the State Court Action and the Adversary Proceeding, Gary Williams died and Elaine Williams was substituted as Plaintiff in both proceedings.
17. On or about October 26, 1986, Trustee Cooper was authorized to substitute as party defendant and counterplaintiff in the Adversary Proceeding.
18. Lawrence Cooper withdrew as Trustee effective May 14, 1987; Joseph Stein was appointed successor Trustee on September 14, 1987.
19. On or about March 17, 1988, Trustee Joseph Stein filed his Motion to Abandon Claim and for Dismissal of Adversary Complaint ("Trustee's Motion").
20. On April 22, 1988, this Court entered an Order granting Trustee's Motion ("Order"). Pursuant to Trustee's abandonment, and because the case had by then been extensively litigated over many years, the Order dismissed Trustee's counterclaim against Plaintiff with prejudice. The Court also ordered Trustee to cause any claims pending "on behalf of the Estate against the Estate of Gary Williams" in any other court to be dismissed with prejudice. In addition, the Order allowed Plaintiff's claim against Debtor.
21. No appeal was taken from the Order and a subsequent order was entered closing the Adversary Proceeding on May 13, 1988.
22. Following entry of the Order, the Stefans have continued to pursue in the State Court Action their affirmative defenses and counterclaims.
23. On or about June 28, 1988 Plaintiff filed in the State Court Action a motion to dismiss the affirmative defenses and counterclaims filed by Debtor and the Stefans on grounds that the claims were barred by the res judicata effect of this Court's Order.
24. On October 7, 1988, Judge Sodaro of the Circuit Court of Cook County ordered that any defenses which were derivative of the Debtor's claims would be stricken and that any defenses which were personal to the Stefans would be allowed to stand.
25. On or about June 23, 1989 Plaintiff filed a second motion to dismiss on grounds that the affirmative defenses and counterclaims of the Stefans were in fact claims of the Debtor which had been barred by res judicata. On November 14, 1989, Judge Sodaro denied the second motion to dismiss without reaching the issues of identity of parties or whether the Stefans were in privity with the Debtor or Trustee.
26. In April of 1990, Plaintiff filed a motion for reconsideration of Judge Sodaro's November 14, 1989 order. On June 13, 1990, Judge Sodaro entered an order continuing the motion for reconsideration to the extent that the Stefans' claims and defenses were found to be derivative of Debtor's. The order otherwise denied the motion.
27. As of the date of these Findings, Judge Sodaro has not determined which, if any, of the Stefans' claims and defenses are derivative of the claims and defenses of Debtor.
28. In addition, the Stefans' motion for summary judgment on their first affirmative defense and two counts of their counterclaim, along with Plaintiff's cross-motion for summary judgment on the second count, are still pending in the State Court Action.
29. On July 11, 1990, Trustee filed his Final Report and Account in which he stated that $3,504.46 remained in receipts which he proposed to use for the payment of Trustee's and attorneys' administrative expenses. The bankruptcy case has now been fully administered and will shortly be formally closed if that has not already been done by the Clerk.
30. On or about August 27, 1990, Plaintiff filed the present Motion for Preliminary Injunction ("Plaintiff's Motion"). Plaintiff argues that this Court should enjoin the Stefans from pursuing their claims in the State Court Action on grounds that the claims are barred due to the res judicata effect of the Court's previous dismissal with prejudice of Trustee's claims.
31. The Stefans respond to Plaintiff's Motion by contending that this Court lacks jurisdiction to hear this matter, and that the doctrine of res judicata is inapplicable due to the...
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