Bavelis v. Doukas (In re Bavelis)
| Decision Date | 22 February 2017 |
| Docket Number | Case No. 10–58583,Adv. Pro. No. 10–2508 |
| Citation | 563 B.R. 672 |
| Parties | IN RE: George A. BAVELIS, Debtor. George A. Bavelis, et al., Plaintiffs, v. Ted Doukas, et al., Defendants. |
| Court | U.S. Bankruptcy Court — Southern District of Ohio |
Marion H. Little, Jr, Zeiger, Tigges & Little LLP, W Mark Jump Columbus, OH, for Plaintiffs.
Justin W. Ristau, Bricker & Eckler LLP, Franklin Connor Davis, Columbus, OH, for Defendants.
John M. Stravato, pro se.
John Doe Defendants 1–25, pro se.
This matter is before the Court in the Chapter 11 case of George A. Bavelis and the adversary proceeding he commenced against several parties, including Ted Doukas. Earlier in the case, Doukas sought to establish that one of his wholly owned companies, Quick Capital of Long Island Corp. ("Quick Capital"), held a $14 million secured claim against Bavelis's bankruptcy estate. But unbeknownst to Bavelis, Doukas had already caused Quick Capital to assign its interest in the note and security agreement on which the claim was based to Socal Capital LLC ("Socal"), a company in which Doukas had no interest. Gary A. Goldstein, counsel for Doukas and Quick Capital, admits that he became aware of the assignment soon after Doukas executed it.
Fully aware of the assignment, Goldstein, Doukas and Quick Capital (collectively, the "Respondents") engaged in a two-year long pattern of deception designed to conceal the assignment from Bavelis and the Court. They failed to produce the assignment in response to multiple document requests that should have elicited it, and they even sent Bavelis's counsel discovery responses stating that no responsive documents existed. The Respondents concede that Quick Capital was no longer a creditor post-assignment, yet they filed several documents with the Court—including a motion seeking the appointment of a Chapter 11 trustee—that identified Quick Capital as a creditor after Doukas executed the assignment. The Respondents then participated in a four-day hearing in which they attempted, without once mentioning the assignment, to establish that Quick Capital held a secured claim.
Attempting to defend their conduct, the Respondents raise a slew of arguments, but they all fall flat. Withholding material evidence and lying to a party and the Court constitute bad faith and an affront to the judicial system that must be redressed. Accordingly, sanctions will be imposed against the Respondents for this bad faith misconduct under § 105(a) of the Bankruptcy Code and based on the Court's inherent authority. The sanctions will include attorneys' fees resulting from the Respondents' bad faith litigation conduct and also may include punitive damages. In addition, because Goldstein was admitted to practice law before the Court and his conduct multiplied these proceedings unreasonably and vexatiously, he also will be sanctioned under 28 U.S.C. § 1927.
The Court has jurisdiction to hear and determine this matter under 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding. See 28 U.S.C. § 157(b)(2)(A) and (O).
On July 20, 2010 (the "Petition Date"), Bavelis filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code, and three months later he commenced this adversary proceeding. The Court confirmed Bavelis's Chapter 11 plan, which provides for 100% payment of all creditors' claims, on December 12, 2014.
The parties brought this matter before the Court by filing:
Bavelis seeks attorneys' fees and costs as well as punitive damages from the Respondents because they (a) failed to produce "clearly responsive documents in discovery that would have disclosed Quick Capital's true status as a non-creditor" and (b) filed documents that "included direct misrepresentations about Quick Capital's ‘creditor’ status." Mot. at 1–2. In light of the allegations in the Motion, the Court entered an order (a) directing the Respondents to appear and show cause why they should not be sanctioned under § 105(a) of the Bankruptcy Code and the Court's inherent authority and (b) directing Goldstein individually to appear and show cause why he should not be sanctioned under 28 U.S.C. § 1927 (Adv. Doc. 604).
The show cause order provided the Respondents with more than three months' notice of the hearing on the Motion and the show cause order (the "Show Cause Hearing"). In addition, the Court entered an order (Adv. Doc. 606) establishing a discovery schedule and deadlines for filing stipulations and witness and exhibit lists.
The Show Cause Hearing was held over the course of two days. The transcript of the first day of the Show Cause Hearing (Adv. Doc. 664) will be referred to as "Transcript I," and the transcript of the second day (Adv. Doc. 666) as "Transcript II."2 Goldstein and Doukas testified during the Show Cause Hearing, as did Richard Stovall, bankruptcy counsel for Bavelis. In addition, Bavelis's Exhibits 206, 210, 215, 217–239, 242–249, 251–261, 264, and 269–279 were admitted into evidence without objection, Tr. II at 31–45, and Doukas's Exhibit K also was admitted into evidence without objection. Tr. II at 55. Doukas and Quick Capital were represented by counsel during the Show Cause Hearing. Acting pro se, Goldstein chose not to present a case in his defense, but instead rested solely on his testimony offered on cross examination. Tr. I at 172–76.
In accordance with an order that was amended multiple times at the request of the parties, Bavelis filed proposed findings of fact and conclusions of law (Adv. Doc. 675), as did Goldstein (Adv. Doc. 676) and Doukas and Quick Capital (Adv. Doc. 677).3
On December 3, 2010, Quick Capital filed a proof of claim asserting a secured claim in the amount of $1,667,791.10 based on a promissory note (the "Note") and a security agreement (the "Security Agreement") that Bavelis signed before the Petition Date. Claim 49–1. Several months later, Quick Capital filed an amended proof of claim based on the same loan documents, asserting a secured claim in the amount of $14 million (the "Claim"). Claim 49–2. The Court disallowed the Claim after finding, among other things, that Doukas fraudulently induced Bavelis to sign the Quick Capital loan documents. Bavelis v. Doukas (In re Bavelis) , 490 B.R. 258, 284 (Bankr. S.D. Ohio 2013) (" Bavelis I "), aff'd , No. 13–8015, 2013 WL 6672988 (6th Cir. BAP Dec. 19, 2013), aff'd , 773 F.3d 148 (6th Cir. 2014). Bavelis I is final and nonappealable. Leading up to that decision, however, the Respondents engaged in the dishonest conduct detailed below, which came to light only after the decision was issued. And it is this dishonest conduct by the Respondents following the Petition Date that warrants the imposition of sanctions.
Doukas is the sole shareholder and only officer of Quick Capital. Tr. I at 35–36. On April 6, 2011, he signed a document in his capacity as the President of Quick Capital entitled "Assignment and Assumption Agreement" (the "Assignment") (Ex. 218), thereby effectuating the sale of all of Quick Capital's "right, title, interest, claim or demand" in the Note and the Security Agreement to Socal for $1.8 million. Ex. 218. Under the terms of the Assignment, the first $2.7 million of any recovery on the Note was to be paid to Socal, and any recovery in excess of $2.7 million was to be paid 25% to Socal and 75% to the other party to the Assignment, an entity known as Avatara of NY Corp. Id. at 2–3. An individual named Ian Chen owned 99% of Socal, and Chen's brother owned the remaining 1%. Ex. 221 at 118–19. According to Chen, the only capital contributions made to Socal were made by his parents and certain of his aunts and uncles. Id. at 39–40. John Stravato, an attorney who had acted as counsel for Doukas and his companies from time to time, owned Avatara. Ex. 222 at 80, 83; Tr. II at 8–9.
There is no evidence that Doukas or Quick Capital had any ownership interest in Socal or Avatara or that Doukas or Quick Capital had any direct or indirect interest in a recovery on the Note. In fact, Doukas, Quick Capital and Socal later stipulated that the Assignment eliminated any interest that Quick Capital otherwise had as a creditor of Bavelis's bankruptcy estate. See Adv. Doc. 328 ¶ 13 (); see also Tr. I at 44. Goldstein likewise conceded that Quick Capital was not a creditor of the estate after it assigned the loan documents to Socal, Tr. I at 45–46, and he also admitted that Doukas—who had not even filed a proof of claim in Bavelis's bankruptcy case—personally would have recovered nothing on the Note post–Assignment. Tr. I at 46–47, 144–45. In short, as a result of the Assignment, neither Doukas nor Quick Capital was a creditor of Bavelis's estate, and thus neither party was entitled to any recovery on account of the Claim.
Goldstein had begun representing Doukas and Quick Capital in Bavelis's bankruptcy case and...
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